[Federal Register Volume 61, Number 160 (Friday, August 16, 1996)]
[Rules and Regulations]
[Pages 42530-42549]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20487]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 933

[No. 96-43]


Membership Approval

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
its regulation on membership in the Federal Home Loan Banks (Banks). 
The final rule authorizes the 12 Banks, rather than the Finance Board, 
to approve or deny all applications for Bank membership, subject to 
certain criteria for determining compliance with the statutory 
eligibility requirements for Bank membership currently used by the 
Finance Board in approving applications. The final rule also provides 
for streamlined application processing for certain types of membership 
applications. The final rule is part of an effort by the Finance Board 
and the Banks to transfer as many governance functions as possible from 
the Finance Board to the Banks. The devolution of authority to the 
Banks and streamlining of membership application requirements in the 
final rule are consistent with the goals of the Regulatory Reinvention 
Initiative of the National Performance Review.

EFFECTIVE DATE: September 16, 1996.

FOR FURTHER INFORMATION CONTACT: Amy R. Maxwell, Associate Director, 
District Banks Secretariat, Office of the Managing Director, (202) 408-
2882, or Sharon B. Like, Senior Attorney-Advisor, Office of General 
Counsel, (202) 408-2930, Federal Housing Finance Board, 1777 F Street, 
N.W., Washington, DC 20006.
SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    In its role as primary regulator of the savings association 
industry and as overseer of the Banks, the Finance Board's predecessor 
agency, the former Federal Home Loan Bank Board (FHLBB), reviewed and 
approved all applications for Bank membership from federally chartered 
savings associations, and from state chartered savings associations 
seeking federal deposit insurance, institutions for which Bank 
membership was required. The FHLBB delegated the authority to approve 
membership applications from insurance companies and state chartered 
savings banks insured by the Federal Deposit Insurance Corporation 
(FDIC), for which Bank membership was voluntary, to the Principal 
Supervisory Agents of the FHLBB, which generally were the Bank 
presidents. See 12 U.S.C. 1437(a) (1989), repealed by Financial 
Institutions Reform, Recovery and Enforcement Act of 1989, Pub. L. No. 
101-73, 103 Stat. 183 (Aug. 9, 1989) (FIRREA); 12 CFR 523.3-3, 541.18 
(1989).
    FIRREA amended the Federal Home Loan Bank Act, 12 U.S.C. 
Secs. 1421-1449 (Bank Act), by creating the Finance Board and 
transferring from the FHLBB to the Finance Board the responsibility for 
the supervision and regulation of the 12 Banks. See 12 U.S.C. 1422a(a). 
The FHLBB's authority to charter federal savings associations was 
transferred to the Office of Thrift Supervision (OTS), and the FHLBB's 
authority to administer deposit insurance for savings associations was 
transferred to the FDIC.
    FIRREA also made significant changes to the membership eligibility 
criteria in section 4 of the Bank Act. See 12 U.S.C. 1424. First, 
FIRREA permitted commercial banks and credit unions to become Bank 
members for the first time. Id. Sec. 1424(a). Second, FIRREA added the 
requirement that an insured depository institution have at least 10 
percent of its total assets in residential mortgage loans in order to 
be eligible to become a Bank member. Id. Sec. 1424(a)(2)(A).
    From the enactment of FIRREA in 1989 until July 1993, all Bank 
membership applications were reviewed and approved by the Board of 
Directors of the Finance Board. In July 1993, the Managing Director of 
the Finance Board was delegated the authority to approve all 
applications for Bank membership from institutions that met all of the 
statutory eligibility criteria and received a composite rating of 
``1,'' ``2'' or ``3'' under the regulatory examination rating system 
known as the Uniform Financial Institutions Rating System. See 
Chairman's Order No. 93-05 (July 19, 1993); Finance Board Res. No. 90-
143 (Dec. 18, 1990). The Board of Directors of the Finance Board has 
not itself considered or acted upon any membership applications since 
such authority was delegated to the Managing Director.
    In August 1993, the Finance Board amended its membership regulation 
in response to the changes made by FIRREA to the Bank Act. The revised 
membership regulation established membership application procedures, 
general eligibility requirements, criteria for determining the 
appropriate Bank district for membership, stock requirements for 
membership, requirements and procedures in connection with termination 
of membership, and procedures concerning transfer of Bank stock in 
consolidations involving member and nonmember institutions. Other than 
defining certain terms, the membership regulation did not establish 
specific standards for compliance with the statutory membership 
eligibility criteria. See 58 FR 43522, 43542 (Aug. 17, 1993), codified 
at 12 CFR part 933. Section 933.3(a) of the membership regulation 
authorized the Banks' boards of directors to approve only applications 
that met all criteria set forth in the Bank Act, the membership 
regulation, and policy guidelines established by the Finance Board. See 
12 CFR 933.3(a).
    In November 1993, the Finance Board adopted policy guidelines to 
assist Finance Board staff in processing applications for Bank 
membership. See Federal Home Loan Bank System Membership Application 
Guidelines, Finance Board Res. No. 93-88 (Nov. 17, 1993) (Guidelines). 
The purpose of the Guidelines was to require certain documentation 
review requirements, and to clarify and amplify the more subjective 
membership eligibility criteria in the Bank Act, such as the financial 
condition, character of management, and home financing policy 
requirements. See 12 U.S.C. 1424(a)(2)(B), (C). The Guidelines also set 
forth the specific criteria that must be satisfied in order for the 
Banks to have the authority to approve membership applications, as 
provided under Sec. 933.3(a) of the membership regulation. See also 59 
FR 13485 (March 22, 1994).
    The Guidelines contain specific, primarily financial, criteria that 
must be met in order for an applicant to be deemed in compliance with 
the statutory eligibility criteria. However, the Guidelines established 
neither a minimum level of financial performance nor standards for 
evaluating applicants that do not meet the requirements in the 
Guidelines. So, for instance, an application from an institution with a 
composite regulatory examination rating that did not satisfy the 
criteria for approval by the Banks had to be evaluated by Finance Board 
staff and approved by the Managing Director. Since December 1993, the 
Banks have approved approximately 1,000 membership applications, and 
the Finance Board's Managing Director has approved approximately 1,100 
membership applications.
    The Finance Board and the Banks have been considering ways to 
transfer a variety of governance responsibilities from the Finance 
Board to the Banks since the completion of studies required by the 
Housing and Community Development Act of 1992, Pub. L. No. 102-550, 106 
Stat. 3672 (Oct. 28, 1992),

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including the Finance Board's own study completed in April 1993. See 
Report on the Structure and Role of the Federal Home Loan Bank System, 
at 153 (Apr. 28, 1993). Finance Board staff and Bank staff have 
consistently identified membership application approval as one of the 
governance responsibilities that should be devolved from the Finance 
Board to the Banks, because the Banks should be allowed broad 
discretion to manage their affairs as long as the Banks comply with the 
Bank Act and Finance Board regulations. This final rule transfers 
authority to approve or deny all Bank membership applications from the 
Finance Board to the Banks. The final rule codifies in large part the 
criteria for determining compliance with the statutory eligibility 
requirements contained in the Finance Board's Guidelines, which shall 
be deemed rescinded upon effectiveness of the final rule.

II. Proposed Rulemaking

    In October 1995, the Finance Board published for public comment a 
notice of proposed rulemaking, which proposed transferring the 
authority to approve or deny membership applications from the Finance 
Board to the Banks, subject to certain criteria for determining 
compliance with the statutory eligibility requirements for Bank 
membership (proposed rule) (60 FR 54958) (Oct. 27, 1995). The proposed 
rule provided for a 60-day comment period.
    The Finance Board received letters from a total of 14 commenters, 
including all 12 Banks, one bank trade association, and one insurance 
company trade association. The commenters generally supported transfer 
of membership approval authority from the Finance Board to the Banks. 
Various comments were received on the proposed application procedures, 
and the specific criteria that should be applied in determining 
membership eligibility. A discussion of relevant comments is included 
in the Analysis of the Final Rule. Where no comments were received on a 
particular regulatory provision, or a provision was not controversial, 
and the Finance Board has determined to adopt the provision as 
proposed, the provision generally is not discussed in this preamble.
    A few comments also were received on provisions of the current 
membership regulation that were not the focus of this rulemaking, such 
as the definition of ``state,'' and ``convenience'' applications for 
membership in adjoining Bank districts. See 12 CFR 933.1(s), 
933.5(a)(2). These comments are not discussed in this final rule, but 
will be examined in connection with any future rulemaking on other 
provisions of the membership regulation not addressed in this 
rulemaking.

III. Analysis of the Final Rule

A. Membership Application Process--Secs. 933.2 to 933.5

1. Requirements--Sec. 933.2
    Section 933.2 of the final rule sets forth the procedures for 
submission and review of membership applications. Section 933.2(a) 
requires an applicant to submit an application which satisfies the 
requirements of part 933, and to provide a written resolution or 
certification duly adopted by the applicant's board of directors, or by 
an individual authorized to act on behalf of the board of directors of 
the applicant, stating that the applicant satisfies the requirements 
set forth in Sec. 933.2(a). The proposed rule required that the 
application include a written certification by a majority of the 
applicant's directors. A commenter pointed out that state corporate 
laws may impose different requirements for a corporate board to take 
valid action and, therefore, that the requirement should be a 
resolution or certification duly adopted by the applicant's board, 
rather than majority action of the board. The final rule adopts this 
recommendation.
    Section 933.2(b) of the final rule requires the Bank to prepare a 
written digest for each applicant stating whether the applicant meets 
each of the eligibility requirements, the Bank's findings, and the 
reasons therefor.
    Section 933.2(c) requires the Bank to maintain a membership file 
for each applicant for at least three years, containing certain 
documents as specified therein.
    Section 933.2(d) of the proposed rule required the Bank to use 
regulatory financial reports and other sources independent of the 
applicant to evaluate and analyze all conclusions offered by the 
applicant regarding its membership eligibility. This requirement is not 
adopted in the final rule, as it is redundant with Sec. 933.11(a) of 
the final rule, which also requires the use of regulatory financial 
reports and other documents derived independently of the applicant. 
Proposed Sec. 933.2(d) also required the Bank to make determinations on 
membership eligibility independent of any representations made by the 
applicant. The Finance Board intended this provision to ensure that the 
Banks evaluate membership applications without relying unduly on simple 
representations of compliance made by the applicants. However, as 
several commenters pointed out, the rule requires reliance, in part, on 
an applicant's representations by requiring that the Bank's membership 
determinations be based on review of all available information in the 
file, which includes information from the applicant. Accordingly, the 
independent evaluation requirement is not adopted in the final rule.
2. Decision on Application--Sec. 933.3
    Section 933.3(a) of the final rule authorizes the Banks to approve 
or deny all membership applications, subject to the requirements of the 
final rule, including the appeal procedure in Sec. 933.5. Eleven 
commenters expressly supported transfer of membership approval 
authority to the Banks.
    Section 933.3(a) also permits a Bank to delegate the authority to 
approve applications only to a committee of the Bank's board of 
directors, the Bank president, or a senior officer who reports directly 
to the Bank president other than an officer with responsibility for 
business development. One commenter recommended that the Bank's board 
of directors be permitted to delegate the authority to deny membership 
applications. However, because of the consequences of membership 
denial, the Finance Board believes that such decisions should be made 
only by the Bank's board of directors.
    Section 933.3(b) requires the Bank to prepare for each applicant a 
written decision resolution duly adopted by the Bank's board of 
directors, or by a committee of the board of directors or officer with 
delegated authority to approve membership applications. The proposed 
rule required that the decision resolution be signed by a majority of 
the directors, or by an officer with delegated authority. A commenter 
pointed out that state corporate laws impose different requirements for 
a corporate board to take valid action and, therefore, that the 
requirement should be a resolution duly adopted by the Bank's board or 
committee of the board, rather than majority action of the board or 
committee of the board. The final rule adopts this recommendation.
    Section 933.3(c) of the final rule requires the Bank to act on an 
application within 60 calendar days of the date the Bank deems the 
application to be complete. Section 933.3(c) is intended to ensure 
expeditious action on membership applications. A number of commenters 
expressed concern that this timeframe may be too restrictive where 
there is a need to obtain additional information about the applicant in 
order to make a

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membership determination. The final rule clarifies that an application 
is ``complete'' when the Bank has obtained all the information required 
by this part, and any other information the Bank deems necessary, to 
process the application.
    Thus, the 60-day clock will not start running until the Bank has 
obtained all information necessary to process the application. The 
final rule also provides that if a ``complete'' application 
subsequently becomes ``incomplete'' because the Bank determines, during 
the review process, that additional information is necessary to process 
the application, the Bank may stop the 60-day clock until the 
application again is deemed complete, and then resume the clock where 
it left off. The final rule requires the Bank to notify an applicant 
when its application is deemed to be complete. The Bank also is 
required to notify an applicant if the 60-day clock is stopped, and 
when the clock is resumed.
3. Automatic Membership--Sec. 933.4
    Section 933.4 provides for automatic Bank membership for 
institutions seeking Bank membership under certain circumstances. Such 
institutions need not file an application for membership.
    Section 933.4(a) provides for automatic Bank membership for 
institutions required by law to be Bank members.
    Section 933.4(b) provides for automatic Bank membership for insured 
depository institution members that convert from one charter type to 
another, provided that the converting institution continues to be an 
insured depository institution and the assets of the institution 
immediately before and immediately after the conversion are not 
materially different. In response to a commenter's suggestion, the 
final rule modifies the requirement in the proposed rule that the 
assets immediately before and after the charter conversion must be 
identical, since there may be insignificant changes in asset 
composition after a conversion in order to comply with new charter 
requirements.
    Section 933.4(c) of the final rule provides for automatic 
membership in the Bank to which a member's membership is transferred 
pursuant to Sec. 933.18(d).
4. Appeals--Sec. 933.5
    Section 933.5 establishes a process by which applicants may appeal 
Bank membership denials to the Finance Board. The appeal procedure is 
intended to ensure that membership standards are applied fairly by the 
Banks, and that similarly situated applicants are treated in a 
consistent manner.
    Section 933.5 (a), (b) and (c) establishes the procedures and 
requirements for appeals by an applicant to the Finance Board.
    The current membership regulation does not include the provision in 
the proposed rule that would allow a Bank to appeal another Bank's 
determination of the appropriate district for membership made pursuant 
to Sec. 933.5, but permits applicants or members to appeal such 
determinations to the Finance Board. See 12 CFR 933.5. Since the 
applicant or member has the option under Sec. 933.18 of the final rule 
to appeal the Bank's decision, an appeal by the other Bank is 
unnecessary. Moreover, like the current membership regulation, 
Sec. 933.18 sets forth specific, objective criteria for determining an 
applicant's or member's appropriate district of membership, which 
should obviate such conflicts in the application process. Accordingly, 
this proposed amendment has not been adopted in the final rule.

B. Membership Eligibility Requirements--Secs. 933.6 to 933.18

1. Setting Membership Standards
    Like the Guidelines, the final rule establishes objective standards 
for approving applications for Bank membership. For the objective 
statutory eligibility criteria, failure to comply with the standards 
established by the final rule will render an applicant ineligible for 
membership. For the subjective statutory eligibility criteria, 
including the requirement that an applicant's financial condition be 
such that advances may be safely made, see 12 U.S.C. 1424(a)(2)(B), and 
that the character of an applicant's management and its home financing 
policy be consistent with sound and economical home financing, see id. 
Sec. 1424(a)(2)(C), the final rule, like the Guidelines, establishes 
objective, yet flexible, standards.
    Under Sec. 933.17(a) of the final rule, an applicant that complies 
with the regulatory requirements is presumed to satisfy the statutory 
eligibility criteria, but the Bank may rebut the presumption of 
compliance, and deny membership to the applicant, if the Bank obtains 
substantial evidence to overcome the presumption. Conversely, under 
Sec. 933.17 (b) to (f), an applicant that does not comply with the 
regulatory requirements is presumed not to satisfy the statutory 
eligibility criteria, but, as under the Guidelines, the applicant may 
rebut the presumption of noncompliance as provided in Sec. 933.17 (b) 
to (f), and be deemed to meet the regulatory requirements.
    The Finance Board considered establishing rigid, ``bright-line'' 
eligibility standards, but believes that the results--i.e., that an 
applicant not meeting every standard would be ineligible for 
membership, regardless of any other evidence the applicant could have 
presented to demonstrate its compliance with the statutory eligibility 
criteria--would be too harsh. Six commenters expressly supported a 
presumption framework, rather than ``bright-line'' tests, for a similar 
reason.
2. Section 4(a)(1) Criteria In General
    Section 4(a)(1) of the Bank Act defines the types of financial 
institutions eligible to become Bank members as any building and loan 
association, savings and loan association, cooperative bank, homestead 
association, insurance company, savings bank, or any insured depository 
institution. See 12 U.S.C. 1424(a)(1). The definition of ``insured 
depository institution'' in the Bank Act includes commercial banks and 
credit unions. See id. Sec. 1422(12).
    The eligibility criteria set forth in section 4(a)(1) of the Bank 
Act apply to all applicants for Bank membership, including insurance 
companies (section 4(a)(1) criteria). Under section 4(a)(1) of the Bank 
Act, an institution is eligible for Bank membership if the institution:
    (A) is duly organized under the laws of any State or of the United 
States;
    (B) is subject to inspection and regulation under the banking laws, 
or under similar laws, of the State or of the United States; and
    (C) makes such home mortgage loans as, in the judgment of the 
[Finance] Board, are long-term loans * * *.
    See id. Sec. 1424(a)(1) (A) to (C). Sections 933.7 to 933.9 of the 
final rule apply the section 4(a)(1) criteria to all applicants for 
membership.
3.-``Duly Organized'' Requirement--Sec. 933.7
    Section 4(a)(1)(A) of the Bank Act requires that, in order to be 
eligible for Bank membership, an applicant must be duly organized under 
the laws of any State or of the United States. 12 U.S.C. 1424(a)(1)(A). 
This general eligibility requirement is implemented by 
Secs. 933.6(a)(1) and 933.7 of the final rule. Noncompliance by an 
applicant with the ``duly organized'' requirement is not a rebuttable 
presumption under Sec. 933.17.
4.-``Subject to Inspection and Regulation'' Requirement--Sec. 933.8
    Section 4(a)(1)(B) of the Bank Act requires that, in order to be 
eligible for

[[Page 42534]]

Bank membership, an applicant must be subject to inspection and 
regulation under the banking laws, or under similar laws, of the State 
or of the United States. 12 U.S.C. 1424(a)(1)(B). This general 
eligibility requirement is implemented by Secs. 933.6(a)(2) and 933.8 
of the final rule. Noncompliance by an applicant with the ``subject to 
inspection and regulation'' requirement is not a rebuttable presumption 
under Sec. 933.17 except for insurance company applicants, as further 
discussed under Sec. 933.17(c).
5. ``Makes Long-Term Home Mortgage Loans'' Requirement--Sec. 933.9
    Section 4(a)(1)(C) of the Bank Act requires that, in order to be 
eligible for Bank membership, an applicant must make long-term home 
mortgage loans. This general eligibility requirement is implemented by 
Secs. 933.6(a)(3) and 933.9 of the final rule.
    a. Definitions of ``long-term'' and ``home mortgage loan.''
    Section 933.1(n) of the final rule lists the specific types of 
assets that qualify as ``home mortgage loans'' for purposes of the 
``makes long-term home mortgage loans'' requirement. Section 933.1(n), 
as well as the definition of ``long-term'' in Sec. 933.1(q), do not 
include the Finance Board's current regulatory discretion to determine 
that other types of loans not specifically listed in the definitions of 
``home mortgage loan'' and ``long-term'' meet these definitions. See 12 
CFR 933.1(i), (l).
    One commenter noted that this discretionary authority would enable 
a Bank first to seek an interpretation from the Finance Board on 
whether a particular asset meets the definitions, which may be more 
efficient than requiring the Bank to deny an application and the 
applicant to appeal to the Finance Board before the Finance Board may 
exercise its interpretive discretion. In the event of an appeal of a 
Bank membership decision to the Finance Board, this approach would 
enable the Finance Board to exercise its interpretive discretion on a 
case-by-case basis without having to amend the regulation. However, the 
Finance Board believes that the list of assets permitted under 
Sec. 933.1(n) is comprehensive, and there is little likelihood that an 
applicant will need a non-qualifying asset in order to meet the ``makes 
long-term home mortgage loans'' requirement. Should questions arise 
regarding particular assets, they could be resolved through amendment 
of the regulation, rather than through Finance Board determinations on 
a case-by-case basis. Accordingly, the commenter's recommendation is 
not adopted in the final rule.
    b. Noncompliance not rebuttable.
    Noncompliance by an applicant with the ``makes long-term home 
mortgage loans'' requirement is not a rebuttable presumption under 
Sec. 933.17.
6. Section 4(a)(2) Criteria In General
    Section 4(a)(2) of the Bank Act establishes the following 
membership eligibility criteria for insured depository institutions 
that were not Bank members on January 1, 1989 (section 4(a)(2) 
criteria):
    (A) the institution has at least 10 percent of its total assets in 
residential mortgage loans;
    (B) the institution's financial condition is such that advances may 
be safely made to such institution; and
    (C) the character of the institution's management and its home-
financing policy are consistent with sound and economical home 
financing.
    See 12 U.S.C. 1424(a)(2)(A) to (C). Although the section 4(a)(2) 
criteria apply to ``insured depository institutions,'' Sec. 933.6(a)(4) 
to (6) of the final rule applies the section 4(a)(2)(B) (financial 
condition) and (C) (character of management and home financing policy) 
criteria to insurance companies as well as insured depository 
institutions. This is consistent with current membership regulatory 
requirements. See 12 CFR 933.4(a)(4), (5). In addition, prior to the 
enactment of FIRREA in 1989, the financial condition, character of 
management and home financing policy criteria were applicable to 
insurance companies. See 47 Stat. 726 (July 22, 1932).
    The final rule does not apply the 10 percent requirement in section 
4(a)(2)(A) to applicants that are not insured depository institutions, 
such as insurance companies. The reasons for this approach are 
discussed more fully below under the 10 Percent Requirement.
7. 10 Percent Requirement--Sec. 933.10
    a. Insured depository institution applicants. -
    Section 4(a)(2)(A) of the Bank Act requires that, in order to be 
eligible for Bank membership, an insured depository institution must 
have at least 10 percent of its total assets in residential mortgage 
loans. See 12 U.S.C. 1424(a)(2)(A). This general eligibility 
requirement is implemented by Sec. 933.6(b) of the final rule. Under 
Sec. 933.10 of the final rule, an insured depository institution 
applicant is deemed to comply with the 10 percent requirement in 
section 4(a)(2)(A) of the Bank Act if, based on the applicant's most 
recent regulatory financial report, the applicant has at least 10 
percent of its total assets in ``residential mortgage loans,'' as 
defined in Sec. 933.1(bb) of the final rule, except that any assets 
used to secure mortgage debt securities as described in 
Sec. 933.1(bb)(6) may not be used to meet this requirement.
    b. Applicants that are not insured depository institutions.
    The Finance Board's practice has been not to apply the 10 percent 
requirement to applicants that are not insured depository institutions, 
such as insurance companies. See 12 CFR 933.4(b)(1). Section 933.6(c) 
of the final rule continues the current regulatory requirement that 
such applicants must meet an alternative requirement that they have 
mortgage-related assets reflecting a commitment to housing finance, 
with such determination made by the Bank in its discretion, rather than 
by the Finance Board. See 12 CFR 933.4(c). Several commenters 
specifically supported application of this alternative test to 
applicants that are not insured depository institutions.
    In the notice of proposed rulemaking, the Finance Board 
specifically requested comment on whether the 10 percent requirement 
should apply to insurance company applicants, or whether a different 
test, or asset test that would achieve the same objectives as the 10 
percent requirement, should be applied to insurance company applicants. 
The Finance Board questioned whether membership eligibility standards 
should be applied consistently to all applicants, in order to ensure 
that all Bank members demonstrate a quantifiable minimum commitment to 
residential housing finance before they are admitted to membership. See 
60 FR 54958, 54962 (Oct. 27, 1995).
    Two commenters supported applying the 10 percent requirement to 
insurance company applicants on the basis that all applicants for 
membership should be treated equally. A majority of the commenters 
opposed applying the 10 percent requirement to insurance company 
applicants for a number of reasons, including: (1) inconsistency with 
section 4(a)(2)(A) of the Bank Act which, on its face, is applicable 
only to insured depository institutions; (2) insurance companies that 
are active in mortgage lending or have significant investments in 
housing-related assets may not be able to meet the 10 percent 
requirement because of their asset size; and (3) insurance companies 
are required by state law, regulators, and prudent investment standards 
to invest in a wide variety of assets.
    The Finance Board agrees that these are valid reasons for not 
applying the 10

[[Page 42535]]

percent requirement to insurance company applicants, consistent with 
current practice. Accordingly, the final rule applies the alternative 
mortgage-related assets test, rather than the 10 percent requirement, 
to institutions that are not insured depository institutions, including 
insurance company applicants.
    c. Definition of ``residential mortgage loans.''
    The term ``residential mortgage loans'' is not defined in the Bank 
Act. The definition of ``residential mortgage loans'' in the proposed 
rule included the current definition, see 12 CFR 933.1(r), as well as 
qualified private activity exempt facility bonds where 95 percent or 
more of the net proceeds are used for qualified residential rental 
projects, as defined in 26 U.S.C. 142(a)(7)(d). Under the current 
membership regulation, the Finance Board has interpreted ``residential 
mortgage loans'' to include such bonds.
    Several commenters supported inclusion of such bonds in the 
definition of ``residential mortgage loans.'' The Finance Board has 
determined that such bonds are consistent with other assets that are 
treated as ``residential mortgage loans.'' Further, treating such bonds 
as ``residential mortgage loans'' is consistent with the purpose of the 
10 percent requirement to ensure that new members hold at least 10 
percent of their total assets in assets that facilitate home mortgage 
lending. The Finance Board does not expect the Bank to verify the 
actual usage of the bond proceeds for the qualified residential rental 
projects. The Finance Board also recognizes that there may be other 
similar types of bonds that should be permissible as ``residential 
mortgage loans.'' Accordingly, the addition of the word 
``substantially'' in the definition of ``residential mortgage loan'' in 
Sec. 933.1(bb)(6)(i) of the final rule provides for the inclusion of 
such bonds and other similar types of bonds that meet the definition.
    In the proposed rule, the Finance Board specifically requested 
comment on whether shares of open-end management companies, also known 
as ``mutual funds,'' where the assets in the open-end management 
company's portfolio are comprised solely of assets that are 
``residential mortgage loans,'' should be included as ``residential 
mortgage loans.'' Ownership of mutual fund shares could be considered 
the functional equivalent of ownership of the mutual fund's underlying 
assets. Several commenters specifically supported inclusion of shares 
of such mutual funds within the definition of ``residential mortgage 
loans.'' One commenter suggested that mutual fund shares be allowed 
where the mutual fund has a small percentage of its capital in cash or 
liquid assets. However, the Finance Board has not previously 
interpreted ``residential mortgage loans'' to include mutual fund 
shares, and is not seeking to expand the types of assets that may 
qualify as ``residential mortgage loans'' at this time. Accordingly, 
the definition of ``residential mortgage loans'' in the final rule does 
not include mutual fund shares.
    The current membership regulation and proposed rule required that 
``residential mortgage loans'' be domestic loans. See 12 CFR 933.1(r). 
However, the line items in regulatory financial reports corresponding 
to such loans may include foreign as well as domestic loans. In order 
to ease applicants' ability to rely on such line items for purposes of 
determining their ``residential mortgage loans'' for the 10 percent 
requirement, under the final rule, applicants may include foreign 
residential mortgage loans.
    For the same reasons discussed under part III.B.5.a. above, 
Sec. 933.1(bb) of the final rule does not include the Finance Board's 
current regulatory discretion to determine that other loans not 
specifically listed in the definition of ``residential mortgage loan'' 
meet the definition. See 12 CFR 933.1(r)(8).
    d. Definition of ``total assets.''
    Section 4(a)(2)(A) of the Bank Act and Sec. 933.10 of the final 
rule provide that, in order to be eligible for Bank membership, an 
applicant must have at least 10 percent of its ``total assets'' in 
residential mortgage loans. See 12 U.S.C. 1424(a)(2)(A). The proposed 
rule listed the specific assets included in the definition of ``total 
assets.'' Since the applicant will be relying on the total assets 
reported on its regulatory financial report, the definition in 
Sec. 933.1(dd) of the final rule is revised to mean total assets as 
reported on the applicant's regulatory financial report.
    The total assets line item in regulatory financial reports may 
include foreign as well as domestic assets. In order to ease 
applicants' ability to rely on such line item for purposes of 
determining their ``total assets'' for the 10 percent requirement, 
under the final rule, applicants may include foreign assets as part of 
total assets.
    e. Noncompliance not rebuttable.
    Noncompliance by an applicant with the 10 percent requirement is 
not a rebuttable presumption under Sec. 933.17.
8. Financial Condition Requirement for Applicants Other Than Insurance 
Companies--Sec. 933.11
    Section 4(a)(2)(B) of the Bank Act requires that, in order to be 
eligible for Bank membership, an insured depository institution's 
financial condition must be such that advances may be safely made to 
it. 12 U.S.C. 1424(a)(2)(B). Section 933.6(a)(4) of the final rule 
applies this general requirement to all applicants for membership, 
including applicants that are not insured depository institutions such 
as insurance companies. Section 933.11 implements this requirement by 
establishing specific financial condition standards applicable to 
applicants other than insurance companies, and is modeled on the 
Guidelines. As discussed below, Sec. 933.16 implements this requirement 
by establishing specific financial condition standards applicable to 
insurance companies that recognize the specialized nature of the 
insurance business.
    a. Review requirement.
    Section 933.11(a) describes the documents pertaining to financial 
condition that must be reviewed for each applicant. Under 
Sec. 933.11(a)(1), the Bank must obtain and review the applicant's 
regulatory financial reports for at least the last six calendar 
quarters and three year-ends. In response to a commenter's suggestion, 
the definition of ``regulatory financial report'' in Sec. 933.1(aa) of 
the final rule is revised to include a regulatory financial report 
maintained by the primary regulator on a computer on-line database.
    Section 933.11(a)(2) lists, in order of preference, the financial 
statement that a Bank must obtain and review in evaluating the 
applicant's financial condition. This provision has been revised from 
the proposed rule to make it consistent with the financial statement 
requirement in the Guidelines.
    Under Sec. 933.11(a)(3) of the final rule, the Bank must obtain and 
review the applicant's most recent available regulatory examination 
report prepared by its primary regulator, as defined in Sec. 933.1(y), 
or appropriate state regulator, as defined in Sec. 933.1(f), and 
prepare a summary of the applicant's strengths and weaknesses as cited 
in the regulatory examination report. The Bank or the applicant also 
must prepare a summary of actions taken by the applicant to respond to 
examination weaknesses.
    Under Sec. 933.11(a)(4), the Bank also must obtain and review a 
description of any outstanding enforcement actions against the 
applicant, responses by the

[[Page 42536]]

applicant, reports as required by the enforcement action, and verbal or 
written indications, if available, from the primary regulator or 
appropriate state regulator, whichever is applicable, of how the 
applicant is complying with the terms of the enforcement action. In 
response to two comments, ``enforcement action'' is defined in 
Sec. 933.1(l) of the final rule to exclude board of directors' 
resolutions adopted by applicants in response to examination weaknesses 
identified by the regulator.
    Under Sec. 933.11(a)(5), the Bank also must obtain and review any 
other relevant document or information concerning the applicant that 
comes to the Bank's attention in reviewing the applicant's financial 
condition. The proposed rule required that a Bank also consider other 
relevant information that reasonably should come to the Bank's 
attention in reviewing the applicant's financial condition. This was 
intended to impose a measure of due diligence on the Bank as a part of 
the membership approval process. Several commenters opposed this 
requirement because: (1) it imposes an undefined or unreasonably high 
standard that could be prohibitively costly (e.g., on-line database 
searches); (2) the most valuable information comes from the applicant 
and its regulator; and (3) the Banks could be exposed to liability for 
reliance on inaccurate or insufficient information. For the reasons 
cited by the commenters, the final rule does not incorporate this ``due 
diligence'' requirement.
    b. Standards of adequate ``financial condition.''
    The Bank Act does not define the term ``financial condition'' for 
purposes of membership eligibility, except to say that financial 
condition must be ``such that advances may be safely made.'' 12 U.S.C. 
1424(a)(2)(B). The Finance Board believes that specific, uniform and 
quantifiable standards for evaluating financial condition are necessary 
to ensure that Bank advances may be extended in a safe and sound 
manner.
    Under Sec. 933.11(b)(1), in order to be presumed to be in adequate 
financial condition for purposes of section 4(a)(2)(B) of the Bank Act 
and Sec. 933.6(a)(4) of the final rule, an applicant must have received 
a composite regulatory examination rating from its primary regulator or 
appropriate state regulator within two years preceding the date the 
Bank receives the application. The Finance Board requires that the 
applicant have been examined within this two-year period in order to 
ensure the accuracy of critical information used for financial 
condition eligibility determinations. Section 933.11(b)(3) establishes 
the minimum performance standard the applicant must satisfy, based on 
the applicant's most recent composite regulatory examination rating 
from its primary regulator or appropriate state regulator.
    The proposed rule required that the applicant have received such a 
rating from its primary regulator. Several commenters supported 
allowing the Banks to accept composite regulatory examination ratings 
from state or federal regulators because: (1) state regulatory 
examination reports containing ratings may be obtainable and just as 
reliable as federal regulatory examination reports in reviewing an 
applicant's financial condition; and (2) state and federal regulators 
may alternate examination cycles or may conduct joint examinations for 
some state chartered, federally insured institutions, and they 
typically examine regulated entities at least every two years. In 
response to these comments, the final rule allows use of the most 
recent state or federal regulatory examination report containing a 
composite regulatory examination rating.
    Section 933.11(b)(2) of the final rule requires an applicant to 
meet all of its minimum statutory and regulatory capital requirements 
in order to satisfy the financial condition requirement.
    Under Sec. 933.11(b)(3)(i), in order to be presumed to be in 
adequate financial condition, the applicant's most recent composite 
regulatory examination rating from its primary regulator or appropriate 
state regulator within the past two years must be ``1;'' or must be 
``2'' or ``3'' and the applicant also must satisfy certain performance 
trend criteria.
    The term ``composite regulatory examination rating'' is defined in 
Sec. 933.1(j) of the final rule as a composite rating assigned to an 
institution following the guidelines of the Uniform Financial 
Institutions Rating System (UFIRS), including a CAMEL rating, a MACRO 
rating or other similar rating, contained in a written regulatory 
examination report. The composite regulatory examination rating for an 
insured depository institution is determined according to the UFIRS, 
commonly referred to as the CAMEL rating system. The UFIRS is an 
internal supervisory rating system used by Federal regulatory agencies 
for evaluating the soundness of financial institutions on a uniform 
basis and for identifying those institutions requiring special 
supervisory attention or concern. Under the UFIRS, each institution is 
assigned a composite rating based on an evaluation and rating of five 
essential components--capital, assets, management, earnings, and 
liquidity--of an institution's financial condition and operations. The 
composite rating reflects, in a comprehensive fashion, an institution's 
overall financial condition, compliance with banking statutes and 
regulations, and management capability. A composite rating of ``1'' is 
the highest possible rating on a 5-point scale, indicating the 
strongest performance and management practices. A composite rating of 
``5'' indicates the weakest performance and management practices and, 
therefore, the highest degree of supervisory concern. The Federal 
Financial Institutions Examination Council recently proposed changes to 
the UFIRS, including adding a sixth rating component addressing 
sensitivity to market risks. See 61 FR 37472 (July 18, 1996). The 
language in Sec. 933.1(j) and (z) of the final rule incorporates this 
proposed change by referring generally to the UFIRS and removing 
specific references to the five rating components.
    The importance of the composite regulatory examination rating in 
the membership approval process may be illustrated in the breakdown of 
the ratings assigned to applicants approved by the Finance Board since 
the enactment of FIRREA--all but one institution approved for 
membership have been rated ``1,'' ``2'' or ``3''; the single ``4''-
rated institution approved for membership has since been upgraded. No 
``5''-rated institutions have been approved for membership.
    Using the UFIRS to evaluate membership applicants reduces the 
documentation requirements for applicants, limits the potential for the 
Banks to be perceived by applicants as another layer in the financial 
regulatory structure, adds considerable efficiency to the application 
process, and provides an independent assessment by those responsible 
for the soundness of the entity.
    Under Sec. 933.11(b)(3)(i) of the final rule, a composite 
regulatory examination rating of ``2'' or ``3'' may be an acceptable 
financial condition performance standard if the applicant also meets 
certain additional performance trend criteria. These criteria are 
designed to identify trends in the institution's key performance areas 
by reviewing the six most recent calendar quarters of financial data. 
The performance trend criteria are: (1) positive adjusted net income in 
4 of the 6 most recent calendar quarters; (2) nonperforming loans, 
leases and securities plus foreclosed and repossessed real estate not 
exceeding 10

[[Page 42537]]

percent of performing loans, leases and securities plus foreclosed and 
repossessed real estate, in the most recent calendar quarter; and (3) a 
ratio of the allowance for loan and lease losses to nonperforming 
loans, leases and securities of 60 percent or greater during 4 of the 6 
most recent calendar quarters. These performance trend criteria are 
derived from the criteria contained in the Guidelines.
    The terms used in the ratios are more specifically defined in 
Sec. 933.1(b), (d), (u), and (x) of the final rule, modeled after the 
Guidelines, to aid applicants and the Banks in determining the 
appropriate line items to use from the regulatory financial reports. In 
some cases, the terminology is clarified to reflect that used in the 
regulatory financial reports.
    In the proposed rule, the denominator for the nonperforming assets 
ratio was incorrectly identified as ``total assets.'' The Finance Board 
intended to continue requiring use of a denominator consistent with 
that used in the Guidelines, i.e., performing assets plus foreclosed 
and repossessed real estate. This is corrected in the final rule.
    In the proposed rulemaking, the Finance Board specifically 
requested comment on whether the nonperforming assets ratio should be 8 
percent, instead of the proposed 10 percent. Two commenters supported a 
10 percent requirement, in order to provide maximum flexibility in 
membership decisions and to prevent ``undue hardship'' in cases of 
mergers and acquisitions. One commenter stated that the 10 percent 
requirement was too liberal. The final rule adopts the 10 percent 
requirement which, to date, has served as an adequate performance trend 
indicator.
    Two additional performance trend ratios included in the Guidelines 
for applications reviewed by the Banks under the delegation criteria 
are not included in the final rule. The Finance Board has determined 
that the three ratios discussed above are adequate to determine 
applicants' performance trends and that no additional criteria are 
necessary for this purpose.
    Various other comments were received recommending changes to some 
of the performance trend criteria. The final rule does not adopt these 
changes, as the Finance Board believes that the three ratios as 
specified are sufficient for determining an institution's performance 
trends.
    A number of commenters stated that the financial condition 
requirement in Sec. 933.11 is too stringent, arguing that such in-depth 
financial review for membership decisions exceeds, and should not be 
confused with, that which should be required for lending decisions. 
However, the Bank Act requires that an institution have a ``financial 
condition * * * such that advances may be safely made.'' 12 U.S.C. 
1424(a)(2)(B). The argument was made that the Bank Act should be 
interpreted to presume that any applicant with ``eligible collateral'' 
would meet the financial condition requirement of section 4(a)(2)(B) of 
the Bank Act. However, in order to minimize the possibility of the 
Banks becoming a liquidity source for weak or failing institutions, the 
Finance Board has determined that a minimum level of financial analysis 
should be required for all applicants as a prerequisite to membership. 
Section 933.11(c) of the final rule states that the availability of 
sufficient eligible collateral to secure advances to the applicant is 
presumed and shall not be considered in determining whether an 
applicant is in the financial condition required by section 4(a)(2)(B) 
of the Bank Act and Sec. 933.6(a)(4) of the final rule. One commenter 
expressly supported this provision in the rule.
    c. Noncompliance is rebuttable.
    As further discussed below under Sec. 933.17(d)(1), noncompliance 
by an applicant with the financial condition requirement is a 
rebuttable presumption.
9. Character of Management Requirement--Sec. 933.12
    Section 4(a)(2)(C) of the Bank Act requires that the ``character of 
[an applicant's] management'' be ``consistent with sound and economical 
home financing.'' 12 U.S.C. 1424(a)(2)(C). Section 933.6(a)(5) of the 
final rule applies this general requirement to all applicants, 
including insurance companies. Section 933.12 implements this 
requirement by establishing specific character of management standards 
applicable to such applicants, modeled after the Guidelines.
    a. Standards of adequate ``character of management.''
    Section 933.12 has been simplified from the proposed rule by 
removing the proposed review requirements and allowing the Bank to rely 
solely on an unqualified written certification from the applicant that 
it meets all of the specified standards.
    Under Sec. 933.12(a), neither the applicant nor any of its 
directors or senior officers may be subject to, or operating under, any 
enforcement action instituted by its primary regulator or appropriate 
state regulator. One commenter suggested that demonstrated full 
compliance by an applicant with an enforcement action should be 
sufficient to meet the standard. Section 933.17(e)(1) of the final rule 
provides, instead, that an applicant may rebut the presumption of 
noncompliance by showing substantial compliance with all aspects of the 
enforcement action.
    Under Sec. 933.12(b), neither the applicant nor any of its 
directors or senior officers shall have been the subject of any 
criminal, civil or administrative proceedings reflecting upon 
creditworthiness, business judgment, or moral turpitude, since the most 
recent regulatory examination report.
    Under Sec. 933.12(c), there must be no known potential criminal, 
civil or administrative monetary liabilities, material pending 
lawsuits, or unsatisfied judgments against the applicant or any of its 
directors or senior officers, since the most recent regulatory 
examination report, that are significant to the applicant's operations. 
This provision was revised in response to comments that the proposed 
requirement was too burdensome unless it applied only to such 
liabilities, lawsuits or judgments that are significant to an 
applicant's operations.
    The proposed rule required that the written certification be 
provided by a majority of the applicant's board of directors, or by an 
individual with authority to act on behalf of the board. A commenter 
pointed out that state corporate laws impose different requirements for 
a corporate board to take valid action and, therefore, that the 
requirement should be a certification duly adopted by the applicant, 
rather than majority action. The final rule adopts this recommendation. 
The Finance Board has found the written certification to be the best 
way to surface any character of management issues, and to get an 
explanation of those issues because the burden of disclosure is placed 
on the applicant.
    b. Noncompliance is rebuttable.
    As further discussed below under Sec. 933.17(e), noncompliance by 
an applicant with the character of management requirement is a 
rebuttable presumption.
10. Home Financing Policy Requirement--Sec. 933.13
    Section 4(a)(2)(C) of the Bank Act requires that an applicant's 
``home-financing policy'' be ``consistent with sound and economical 
home financing.'' 12 U.S.C. 1424(a)(2)(C). Section 933.6(a)(6) of the 
final rule applies this general requirement to all applicants, 
including insurance companies. Section 933.13 implements this 
requirement by

[[Page 42538]]

establishing specific home financing policy standards applicable to 
such applicants, modeled after the Guidelines.
    a. Standards of adequate ``home-financing policy.''
    Under Sec. 933.13(a), an applicant that has received a Community 
Reinvestment Act (CRA) rating of ``Satisfactory'' or better on its most 
recent formal, or if unavailable, informal or preliminary, CRA 
performance evaluation is deemed to meet the home financing policy 
requirement. The proposed rule required an applicant to have a CRA 
performance evaluation within four years from the date of application. 
The Guidelines did not contain this requirement, and it is expected 
that all applicants will have received such evaluations within the 
four-year timeframe. Accordingly, this four-year requirement is not 
adopted in the final rule. If a formal CRA performance evaluation is 
unavailable, an informal or preliminary CRA performance evaluation from 
the regulator should be permissible as an indicator of the applicant's 
recent CRA performance. Allowing informal or preliminary evaluations 
makes this requirement the same for other applicants as well as de novo 
applicants, which were allowed to provide such evaluations under the 
Guidelines.
    Section 933.13(b) requires an applicant that is not subject to the 
CRA, such as an insurance company, to demonstrate how and why its home 
financing policy is consistent with the Bank System's housing finance 
mission. The home financing policy requirements for de novo insured 
depository institution applicants and recent merger or acquisition 
applicants are discussed below under Secs. 933.14 (a)(4) and (b)(3), 
and 933.15(b).
    Several commenters supported use of CRA performance evaluations to 
determine compliance with the home financing policy requirement. The 
Finance Board acknowledges that CRA performance evaluations are not a 
perfect method for evaluating whether an institution's home financing 
policy is ``consistent with sound and economical home financing.'' CRA 
performance evaluations are based on whether a financial institution 
meets the credit needs of its assessment area through a variety of 
lending activities, rather than solely on its mortgage lending 
activity. See, e.g., 60 FR 22180 (May 4, 1995), 12 CFR 25.22. Further, 
CRA performance evaluations do not consider whether a financial 
institution's home financing policy is ``sound and economical.'' Id. 
However, use of CRA performance evaluations as a proxy for the home 
financing policy requirement appears to be the best method at the 
present time for determining whether an applicant's home financing 
policy meets this requirement.
    Since neither the Congress nor the Finance Board have yet 
specifically defined the Bank System's housing finance mission, the 
Finance Board also acknowledges limitations in requesting a written 
justification demonstrating how and why an applicant's home financing 
policy is consistent with the Bank System's housing finance mission.
    b. Noncompliance is rebuttable.
    As further discussed below under Sec. 933.17(f), noncompliance by 
an applicant with the home financing policy requirement is a rebuttable 
presumption.
11. De Novo Insured Depository Institution Applicants--Sec. 933.14
    Section 933.14 of the final rule establishes the membership 
eligibility requirements for de novo, i.e., newly chartered, insured 
depository institution applicants that have not yet commenced 
operations or that have recently commenced operations.
    a. Newly chartered applicants that have not yet commenced 
operations.
    (1) Streamlined requirements.
    Section 933.14(a) includes a new provision not included in the 
proposed rule, which provides for a streamlined application process for 
newly chartered, insured depository institution applicants that have 
not yet commenced operations. Since either or both the regulatory 
agency that chartered the institution and the agency insuring the 
deposits of an insured depository institution will have determined that 
the institution's financial condition and character of management are 
acceptable, or will have made their approval contingent on the 
institution satisfying these and other requirements, the Banks should 
be able to rely on the agency's determination without having to do a 
duplicative review of these eligibility requirements. Accordingly, 
Sec. 933.14(a)(1) provides that such institutions are deemed to meet 
the requirements of Secs. 933.11 (financial condition) and 933.12 
(character of management), as well as Secs. 933.7 (duly organized) and 
933.8 (subject to inspection and regulation).
    (2) ``Makes long-term home mortgage loans'' requirement.
    Since the agency's charter or insurance approval is not contingent 
on the institution agreeing to make long-term home mortgage loans, as 
required by section 4(a)(1)(C) of the Bank Act and Sec. 933.9, 
Sec. 933.14(a)(2) requires the applicant to file as part of its 
application a written justification acceptable to the Bank of how its 
home financing credit policy and lending practices will include 
originating or purchasing long-term home mortgage loans. See 12 U.S.C. 
1424(a)(1)(C).
    (3) 10 percent requirement.
    Section 933.14(a)(3) implements section 4(a)(2) of the Bank Act by 
providing that the applicant shall have until one year after commencing 
its initial business operations to meet the 10 percent requirement of 
Sec. 933.10. See 12 U.S.C. 1424(a)(2).
    (4) Home financing policy requirement.-
    Since the agency's charter or insurance approval is not contingent 
upon the institution having an adequate home financing policy, as 
required by section 4(a)(2)(C) of the Bank Act and Sec. 933.6(a)(6), 
Sec. 933.14(a)(4)(i) requires the applicant to file as part of its 
application a written justification acceptable to the Bank of how and 
why its home financing credit policy and lending practices will meet 
the credit needs of its community. See 12 U.S.C. 1424(a)(2)(C). 
However, the final rule makes the Bank's approval conditional upon the 
applicant receiving a ``Satisfactory'' or better Community Reinvestment 
Act (CRA) rating on its first formal, or if unavailable, informal or 
preliminary, CRA performance evaluation. Noncompliance with this 
requirement is a rebuttable presumption under Sec. 933.17(f). An 
applicant that is conditionally approved for membership is subject to 
the stock purchase requirements of Sec. 933.20, and is eligible to 
receive advances, in the Bank's discretion, pursuant to 12 CFR part 
935. Under Sec. 933.14(a)(4)(iii), if the applicant's first CRA rating 
is ``Needs to Improve'' or ``Substantial Non-Compliance,'' and the 
applicant is unable to rebut the presumption of noncompliance, the 
applicant's conditional membership approval shall be deemed null and 
void. In such event, Sec. 933.14(a)(4)(iv) provides that the 
liquidation of any outstanding indebtedness owed by the applicant to 
the Bank and redemption of stock of such Bank shall be carried out in 
accordance with Sec. 933.29 of this part.
    b.-Newly chartered applicants that have recently commenced 
operations.
    Section 933.14(b) codifies certain exceptions in the Guidelines to 
the membership eligibility standards for newly chartered applicants 
that have recently commenced operations.
    (1) 10 percent requirement.
    Section 933.14(b)(1) of the final rule implements section 4(a)(2) 
of the Bank Act by providing that the applicant shall

[[Page 42539]]

have until one year after commencing its initial business operations to 
meet the 10 percent requirement of Sec. 933.10. See 12 U.S.C. 
1424(a)(2).
    (2) Financial condition requirement.
    Section Sec. 933.14(b)(2)(i) provides that, for purposes of 
Sec. 933.11(a)(1), an applicant that has not yet filed regulatory 
financial reports for six calendar quarters and three year-ends shall 
provide any regulatory financial reports that it has filed with its 
primary regulator. As discussed earlier, ``regulatory financial 
report'' is defined in Sec. 933.1(aa) to include such reports 
maintained by the primary regulator on a computer on-line database.
    Section 933.14(b)(2)(ii) provides that, for purposes of 
Sec. 933.11(b) (1) and (3), an applicant that has not yet received a 
composite regulatory examination rating from its primary regulator or 
appropriate state regulator shall provide a preliminary or informal, 
written composite regulatory examination rating, if available, from its 
primary regulator or appropriate state regulator. The final rule has 
been revised to take into account the availability of such rating, 
consistent with the Guidelines.
    Under Sec. 933.14(b)(2)(iii) of the final rule, an applicant that 
has not yet filed regulatory financial reports for six calendar 
quarters need not meet the performance trend criteria in 
Sec. 933.11(b)(3)(i) (A) to (C), if: (1) the applicant has filed 
regulatory financial reports with its primary regulator for at least 
three calendar quarters of operation; and (2) the Bank determines that 
the applicant is in substantial compliance with the terms of its 
regulatory business plan. The proposed rule required that the applicant 
have completed regulatory financial reports for at least six calendar 
quarters of operation. Consistent with the Guidelines, the final rule 
requires three, instead of six, calendar quarters of operation. The 
proposed rule also required the Bank to determine such compliance 
either through confirmation in writing by the de novo applicant's 
primary regulator or based on a written analysis provided by the de 
novo applicant. In response to a commenter's recommendation, the final 
rule deletes this requirement, leaving documentation of the Bank's 
determination to its discretion.
    (3) Home financing policy requirement.
    Section 933.14(b)(3) provides that, for purposes of Sec. 933.13, an 
applicant that has not received its first formal, or if unavailable, 
informal or preliminary, CRA performance evaluation, is subject to the 
home financing policy requirements of Sec. 933.14(a)(4).
12. Recent Merger Applicants--Sec. 933.15
    a.-``Pending merger applicants.'' The proposed rule, consistent 
with the Guidelines, set forth specific eligibility requirements for 
pending merger applicants. A ``pending merger applicant'' was defined 
as an institution applying for membership that: (1) is a party to a 
merger or acquisition agreement expected to be consummated within two 
calendar quarters of submission of the membership application (timing 
test); and (2) will account for 75 percent or less of the combined 
assets of the resulting entity at the time of the merger or acquisition 
(materiality test).
    The proposed provisions applicable to pending merger applicants are 
not adopted in the final rule. Since the merger or acquisition has not 
yet been consummated and may never be consummated, the Finance Board 
has determined that applicants expecting to shortly consummate a merger 
or acquisition should be subject to the standard eligibility 
requirements set forth in Secs. 933.7 to 933.13, and should not be 
evaluated based on each party to the transaction or the pending 
resulting entity.
    b.-Recent merger or acquisition applicants. The proposed rule, 
consistent with the Guidelines, set forth specific eligibility 
requirements for recent merger applicants. A ``recent merger 
applicant'' was defined as an institution applying for membership that: 
(1) merged with or acquired another institution within the six calendar 
quarters preceding submission of the membership application (timing 
test); and (2) accounted for 75 percent or less of the combined assets 
of the resulting entity at the time of the merger or acquisition 
(materiality test). The proposed rule required that, for certain of the 
eligibility requirements, each of the parties to the merger or 
acquisition had to satisfy the requirements. The timing and materiality 
tests for the definition of a recent merger or acquisition applicant 
have been eliminated in the final rule.
    Section 933.15 of the final rule streamlines the application 
process by requiring that an applicant resulting entity must satisfy 
the standard eligibility requirements of Secs. 933.7 to 933.13 except 
as provided in Sec. 933.15. The Finance Board has determined that it is 
not necessary to analyze each party to the transaction to determine 
satisfaction of the eligibility requirements.
    (1) Financial condition requirement.
    Section 933.15(a)(i) of the final rule provides that, for purposes 
of Sec. 933.11(a)(1), an applicant that, as a result of a merger or 
acquisition prior to the date the Bank receives its membership 
application, has not yet filed regulatory financial reports for the 
last six calendar quarters and three year-ends (recent merger or 
acquisition applicant), shall provide any regulatory financial reports 
that the applicant has filed with its primary regulator.
    Section 933.15(a)(ii) provides that, for purposes of 
Sec. 933.11(b)(3)(i) (A) to (C), an applicant that, as a result of a 
merger or acquisition, has not yet filed combined regulatory financial 
reports for the last six calendar quarters, shall provide pro forma 
combined financial statements for those calendar quarters in which 
actual combined regulatory financial reports are unavailable.
    (2) Home financing policy requirement.
    Section 933.13(b) provides that, for purposes of Sec. 933.13, a 
recent merger or acquisition applicant has not received its first 
formal, or if unavailable, informal or preliminary, CRA performance 
evaluation, must demonstrate how and why its home financing credit 
policy and lending practices will meet the credit needs of its 
community.
    A recent merger or acquisition applicant may provide evidence to 
rebut a presumption of noncompliance with an eligibility requirement, 
as provided in Sec. 933.17 of the final rule.
13. Insurance Company Applicants--Secs. 933.8, 933.12, 933.13, 933.16
    As discussed in part III.B.2. above, the Bank Act requires that an 
insurance company applicant must meet the membership eligibility 
requirements set forth in section 4(a)(1) of the Bank Act. See 12 
U.S.C. 1424(a)(1); Sec. 933.6(a) (1), (2) and (3) of the final rule. As 
further discussed in part III.B.6., 7., 9., 10., and 13., the final 
rule applies all of the section 4(a)(2) criteria except the 10 percent 
requirement to insurance company applicants, even though the Bank Act, 
on its face, specifically applies the section 4(a)(2) criteria to 
insured depository institution applicants. See 12 U.S.C. 1424(a)(2); 
Secs. 933.12, 933.13, 933.16 of the final rule.
    a.-``Subject to inspection and regulation'' requirement--
Sec. 933.8.
    (1) Standard of adequate inspection and regulation.
    Insurance companies are subject to state, not federal, regulation 
and, therefore, the standards used to inspect and regulate insurance 
companies from state to state are not uniform. Every United States 
insurance company is subject to examination and regulation

[[Page 42540]]

by the state insurance department in its domiciliary state, as well as 
to some level of regulation by the state insurance department in each 
state where the insurance company applicant is licensed to do business. 
State insurance laws are similar to federal banking laws in that they 
require the appropriate state regulator to monitor whether the 
insurance company has complied with minimum capital and reserve, 
financial condition, asset valuation and various consumer-related 
requirements.
    Forty-seven states and the District of Columbia now adhere to the 
financial regulation standards established by the National Association 
of Insurance Commissioners (NAIC) and, thus, are accredited by the 
NAIC. In its proposed rulemaking, the Finance Board specifically 
requested comment on whether the degree of inspection and regulation 
imposed by a particular state, e.g., whether the state insurance 
commissioner is NAIC-accredited, should be a factor in determining 
whether an insurance company applicant satisfies the ``subject to 
inspection and regulation'' requirement of section 4(a)(1)(B) of the 
Bank Act. See 12 U.S.C. 1424(a)(1)(B). Two commenters generally opposed 
requiring an applicant to be subject to inspection and regulation by an 
NAIC-accredited state insurance commissioner, because it could 
discourage insurance company membership. One commenter supported 
establishing such a requirement as a rebuttable presumption.
    Section 933.8 of the final rule requires that an applicant's 
appropriate state regulator be NAIC-accredited to meet the ``subject to 
inspection and regulation'' requirement, in order to ensure some 
minimum degree of inspection and regulation.
    (2) Noncompliance is rebuttable.
    As further discussed below under Sec. 933.17(c), noncompliance by 
an insurance company applicant with the ``subject to inspection and 
regulation'' requirement is a rebuttable presumption.
    b. Financial condition requirement--Sec. 933.16.
    Section 933.16 establishes specific financial condition 
requirements applicable to insurance company applicants that differ 
from those applicable to other applicants under Sec. 933.11, due to the 
differences between the regulatory schemes for insurance companies and 
depository institutions.
    (1) Capital requirements.
    Section 933.16 provides that an insurance company applicant shall 
be deemed to meet the financial condition requirement of section 
4(a)(2)(B) of the Bank Act and Sec. 933.6(a)(4), if the applicant meets 
all of its minimum statutory and regulatory capital requirements and 
the capital standards established by the NAIC, based on the information 
contained in the applicant's most recent regulatory financial report 
filed with its primary regulator. See 12 U.S.C. 1424(a)(2)(B).
    Under the proposed rule, an insurance company applicant was deemed 
to meet the financial condition requirement if: (1) the applicant 
received a regulatory examination by its primary regulator within the 
three years preceding the date of the membership application; (2) the 
applicant's most recent regulatory examination indicated no major 
adverse findings on financial condition; (3) the applicant received a 
composite independent insurance company rating from one of the five 
principal private companies that rate insurance companies within the 
three years preceding the date of the membership application; (4) the 
applicant's most recent composite independent insurance company rating 
was ``strong,'' as defined therein; or alternatively, the applicant had 
an ``adequate rating'' and ``adequate earnings,'' as defined therein; 
(5) the applicant met all of its minimum statutory and regulatory 
capital requirements and the NAIC capital standards, based on the 
applicant's most recent regulatory financial report filed with its 
primary regulator; and (6) the applicant met eight specified minimum 
performance ratios during the most recent year-end or quarter-end 
period. Insurance company regulators do not use the UFIRS to evaluate 
the financial condition of insurance companies.
    One commenter stated that the financial condition requirement 
should be based on satisfaction of the NAIC capital standards, and not 
on additional independent ratings and performance ratios. The commenter 
noted that the NAIC capital standards are relied upon by insurers, 
analysts and regulators to evaluate insurance companies, not all 
insurers want to pay for independent ratings, and most rating services 
do not rate life insurance companies.
    The commenter also stated that the minimum performance ratios may 
be too stringent even for financially strong applicants, are in some 
cases inapplicable to life insurance companies, and where used in the 
NAIC Insurance Regulatory Information System (IRIS), are only intended 
as a screening tool to flag an insurance company for further financial 
evaluation and not as a measure of its financial condition. The 
commenter noted that the IRIS standards require regulatory action only 
if there is an abnormal value in four or more of the IRIS ratios, while 
the rule would deem an insurance company applicant ineligible for Bank 
membership if it fails to meet only one of the rule's eight ratios.
    The Finance Board believes that these points have merit and the 
proposed rule may have applied overly stringent financial condition 
criteria to insurance companies. While not all states have yet adopted 
the NAIC capital standards, the Finance Board believes that these 
standards are a useful measure of an insurance company's financial 
condition. Satisfaction of these standards, as well as the applicant's 
minimum statutory and regulatory capital requirements, should be 
sufficient to deem an insurance company applicant in compliance with 
the financial condition requirement of Sec. 933.6(a)(4). As discussed 
earlier, the applicants also will be required to be subject to 
inspection and regulation by an NAIC-accredited regulator, to ensure a 
minimum degree of inspection and regulation.
    (2) Noncompliance is rebuttable.
    As further discussed below under Sec. 933.17(d)(2), noncompliance 
by an insurance company applicant with the financial condition 
requirement applicable to such applicants is a rebuttable presumption.
14. Rebuttable Presumptions--Sec. 933.17
    Based on the Finance Board's general supervisory authority over the 
Banks, 12 U.S.C. 1422a(a)(3), 1422b(a)(1), and its authority to 
interpret the Bank Act's membership eligibility requirements, id. 
Sec. 1424, the final rule establishes flexible requirements for each 
membership eligibility criterion required by the Bank Act and this 
part. An applicant that meets those requirements is presumed to be in 
compliance with the statutory membership eligibility criteria.
    So, too, an applicant not meeting the requirements is presumed not 
to be in compliance with the Bank Act criteria. Section 933.17 of the 
final rule provides that certain presumptions may be rebutted if the 
applicant provides, or the Bank otherwise obtains, substantial evidence 
to overcome the presumption. This approach is modeled after the 
Guidelines. A number of commenters expressly supported this approach, 
rather than requiring applicants to meet rigid, ``bright line'' 
eligibility requirements, because it provides definite requirements 
while still allowing the Banks to exercise discretion in appropriate 
cases.
    a. Rebutting presumptive compliance.
    Under Sec. 933.17(a), the presumption that an applicant meeting the

[[Page 42541]]

requirements of Secs. 933.7 to 933.16 is in compliance with Sec. 933.6 
(a) and (b), may be rebutted, and the Bank may deny membership to the 
applicant, if the Bank obtains substantial evidence to overcome the 
presumption of compliance.
    b. Rebutting presumptive noncompliance.
    Under Sec. 933.17(b), the presumption that an applicant not meeting 
a particular requirement of Secs. 933.8, 933.11, 933.12, 933.13, or 
933.16 is in noncompliance with Sec. 933.6(a) (2), (4), (5) or (6), may 
be rebutted, and the applicant shall be deemed to meet such 
requirement, if the applicable requirements of Sec. 933.17 are 
satisfied.
    (1) ``Subject to inspection and regulation'' requirement.-
    Section 933.17(c) provides that an insurance company applicant may 
rebut a presumption of noncompliance with the ``subject to inspection 
and regulation'' requirement of Sec. 933.8 by providing substantial 
evidence acceptable to the Bank that it is subject to inspection and 
regulation as required by Sec. 933.6(a)(2), notwithstanding the lack of 
NAIC accreditation.
    (2) Financial condition requirement.
    Section 933.17(d) sets forth the requirements for rebutting a 
presumption of noncompliance with the financial condition requirements 
of Secs. 933.11 and 933.16. Under Sec. 933.17(d)(1), for applicants 
other than insurance companies, in the case of an applicant's lack of a 
composite regulatory examination rating within the required two-year 
period, a variance from the required rating, or a variance from a 
required performance trend criterion, as required under Sec. 933.11, 
the applicant or the Bank shall prepare a written justification 
pertaining to such requirement that provides substantial evidence 
acceptable to the Bank that the applicant is in the financial condition 
required by Sec. 933.6(a)(4), notwithstanding the lack of rating or 
variance. In response to a commenter's suggestion, the final rule 
adopts a ``substantial,'' rather than the proposed ``compelling,'' 
evidence standard, which the Finance Board believes is sufficient for 
purposes of determining an applicant's financial condition.
    Under Sec. 933.17(d)(2) of the final rule, in the case of an 
insurance company applicant's variance from a capital requirement or 
standard of Sec. 933.16, the applicant or the Bank shall prepare a 
written justification pertaining to such requirement or standard that 
provides substantial evidence acceptable to the Bank that the applicant 
is in the financial condition required by Sec. 933.6(a)(4), 
notwithstanding the variance. The proposed rule did not provide for 
rebuttals by insurance company applicants of a presumption of 
noncompliance with the financial condition requirement. Making the 
financial condition requirement a rebuttable presumption for insurance 
companies is consistent with the treatment of other applicants, and is 
reasonable because an insurance company applicant may otherwise be able 
to show that it is in adequate financial condition to be a member of 
the Bank System.
    (3) Character of management requirement.
    Section 933.17(e) sets forth the requirements for rebutting a 
presumption of noncompliance with the character of management 
requirement of Sec. 933.12.
    (4) Home financing policy requirement.
    Section 933.17(f) sets forth the requirements for rebutting a 
presumption of noncompliance with the home financing policy requirement 
of Secs. 933.13, 933.14(a)(4), and 933.14(b)(3), where an applicant 
received a ``Substantial Non-Compliance'' rating on its most recent 
formal, or if unavailable, informal or preliminary, CRA performance 
evaluation, or a ``Needs to Improve'' CRA rating on its most recent 
formal, or if unavailable, informal or preliminary, CRA performance 
evaluation and a CRA rating of ``Needs to Improve'' or better on any 
immediately preceding CRA performance evaluation. This section has been 
revised to incorporate meeting the credit needs of the applicant's 
community, since the provision is now being applied to depository 
institution applicants and not to insurance company applicants. An 
insurance company applicant or recent merger or acquisition applicant 
would have no need for rebuttal, since Secs. 933.13(b) and 933.15(b), 
respectively, already require such applicants to submit written 
justifications regarding their home financing policies.
15. Conforming Changes to Citations
    For the sake of brevity, conforming changes to the citations in 
subparts D through I of part 933 are set out in a table at the end of 
this final rule.

III. Regulatory Flexibility Act

    The final rule largely implements statutory requirements binding on 
applicants for Bank membership, regardless of their size. The Finance 
Board is not at liberty to make adjustments to those statutory 
requirements to accommodate small entities. The final rule does not 
impose any additional regulatory requirements that will have a 
disproportionate impact on small entities. The final rule will, to some 
extent, reduce the criteria for determining compliance with statutory 
eligibility requirements that currently are used by the Finance Board 
in approving membership applications. Therefore, it is certified, 
pursuant to section 605(b) of the Regulatory Flexibility Act, 5 U.S.C. 
605(b), that this final rule will not have a significant economic 
impact on a substantial number of small entities.

IV. Paperwork Reduction Act

    The information collection requirements contained in the proposed 
rule, as well as the information collection requirements in the 
sections redesignated as Secs. 933.18, 933.22, 933.25, 933.26 and 
933.31 of the final rule, which are not otherwise affected by this 
final rule, were submitted to and approved by the Office of Management 
and Budget (OMB) in accordance with the requirements of Sec. 3507(d) of 
the Paperwork Reduction Act of 1995, 44 U.S.C. 3507(d), and assigned 
OMB control number 3069-0004. The title, description of need and use, 
and the respondent description for the information collection 
requirements in this final rule are discussed elsewhere in 
SUPPLEMENTARY INFORMATION. Any comments on this information collection 
should be sent to: Office of Information and Regulatory Affairs of OMB, 
Attention: Desk Officer for Federal Housing Finance Board, Washington, 
DC 20503, and to the Executive Secretary, Federal Housing Finance 
Board, 1777 F Street, N.W., Washington, DC 20006.
    The following table discloses the estimated annual reporting and 
recordkeeping burden:

a. Number of respondents..........................................6,412
b. Total annual responses.........................................6,412
Percentage of these responses collected electronically...............0%
c. Total annual hours requested................................59,152.1
d. Current OMB inventory.......................................38,889.6
e. Difference..................................................20,262.5

    The estimated annual reporting and recordkeeping burden is:
a. Total annualized capital/startup costs.............................0
b. Total annual costs (O&M)...............................$1,683,923.95
c. Total annualized cost requested.........................1,683,923.95
d. Current OMB inventory...................................1,754,181.95
e. Difference.............................................( $70,258.00)

    The approved information collection requirements will not otherwise 
be adversely affected (and may be reduced) by the requirements of the 
final rule.

[[Page 42542]]

List of Subjects in 12 CFR Part 933

    Credit, Federal home loan banks, Reporting and recordkeeping 
requirements.
    Accordingly, the Board hereby amends title 12, chapter IX, 
subchapter B, part 933, of the Code of Federal Regulations as follows:

PART 933--MEMBERS OF THE BANKS

    1. The heading for part 933 is revised to read as set forth above.
    2. The authority citation for part 933 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a, 1422b, 1424, 1426, 1430, 1442.
    3. The table of contents to part 933 is revised to read as follows:

Subpart A--Definitions

Sec.
933.1  Definitions.

Subpart B--Membership Application Process

933.2  Membership application requirements.
933.3  Decision on application.
933.4  Automatic membership.
933.5  Appeals.

Subpart C--Eligibility Requirements

933.6  General eligibility requirements.
933.7  Duly organized requirement.
933.8  Subject to inspection and regulation requirement.
933.9  Makes long-term home mortgage loans requirement.
933.10  10 percent requirement for insured depository institution 
applicants.
933.11  Financial condition requirement for applicants other than 
insurance companies.
933.12  Character of management requirement.
933.13  Home financing policy requirement.
933.14  De novo insured depository institution applicants.
933.15  Recent merger or acquisition applicants.
933.16  Financial condition requirement for insurance company 
applicants.
933.17  Rebuttable presumptions.
933.18  Determination of appropriate Bank district for membership.

Subpart D--Stock Requirements

933.19  Par value and price of stock.
933.20  Stock purchase.
933.21  Issuance and form of stock.
933.22  Adjustments in stock holdings.
933.23  Purchase of excess stock.

Subpart E--Consolidations Involving Members

933.24  Consolidation of members.
933.25  Consolidations involving nonmembers.

Subpart F--Withdrawal and Removal From Membership

933.26  Procedure for withdrawal.
933.27  Procedure for removal.
933.28  Automatic termination of membership for institutions placed 
in receivership.

Subpart G--Orderly Liquidation of Advances and Redemption of Stock

933.29  Orderly liquidation of advances and redemption of stock.

Subpart H--Reacquisition of Membership

933.30  Reacquisition of membership.

Subpart I--Bank Access to Information

933.31  Reports and examinations.

Subpart J--Membership Insignia

933.32  Official membership insignia.

Subparts C Through I of Part 933 [Redesignated as Subparts D 
Through J]

    4. Subparts C through I of part 933 are redesignated as Subparts D 
through J, respectively.


Secs. 933.6 through 933.19  [Redesignated as Secs. 933.19 through 
933.32]

    5. Sections 933.6 through 933.19 are redesignated as Secs. 933.19 
through 933.32, respectively.
    6. Subpart A of part 933 is revised to read as follows:

Subpart A--Definitions


Sec. 933.1  Definitions.

    For purposes of this part:
    (a) Act means the Federal Home Loan Bank Act, as amended (12 U.S.C. 
1421 through 1449).
    (b) Adjusted net income means net income, excluding extraordinary 
items such as income received from or expense incurred in sales of 
securities or fixed assets, reported on a regulatory financial report.
    (c) Aggregate unpaid loan principal means the aggregate unpaid 
principal of a subscriber's or member's home mortgage loans, home-
purchase contracts, and similar obligations.
    (d) Allowance for loan and lease losses means a specified balance-
sheet account held to fund potential losses on loans or leases, that is 
reported on a regulatory financial report.
    (e) Appropriate Federal banking agency has the same meaning as used 
in 12 U.S.C. 1813(q) and, for federally insured credit unions, shall 
mean the National Credit Union Administration.
    (f) Appropriate state regulator means any state officer, agency, 
supervisor or other entity that has regulatory authority over, or is 
empowered to institute enforcement action against, an applicant for 
Bank membership.
    (g) Bank means a Federal Home Loan Bank established under the 
authority of the Act.
    (h) Board means the Federal Housing Finance Board.
    (i) Combination business or farm property means real property for 
which the total appraised value is attributable to residential, and 
business or farm uses.
    (j) Composite regulatory examination rating means a composite 
rating assigned to an institution following the guidelines of the 
Uniform Financial Institutions Rating System (Issued by the Federal 
Financial Institutions Examination Council; for availability contact 
the Federal Housing Finance Board, FOIA Office, 1777 F Street, NW., 
Washington, DC 20006.), including a CAMEL rating, a MACRO rating, or 
other similar rating, contained in a written regulatory examination 
report.
    (k) Dwelling unit means a single room or a unified combination of 
rooms designed for residential use.
    (l) Enforcement action means any written notice, directive, order 
or agreement initiated by an applicant for Bank membership or by its 
primary regulator or appropriate state regulator to address any 
operational, financial, managerial or other deficiencies of the 
applicant identified by such regulator, but does not include a board of 
directors resolution adopted by the applicant in response to 
examination weaknesses identified by such regulator.
    (m) Funded residential construction loan means the portion of a 
loan secured by real property made to finance the on-site construction 
of dwelling units on one-to-four family property or multifamily 
property disbursed to the borrower.
    (n) Home mortgage loan means:
    (1) A loan, whether or not fully amortizing, or an interest in such 
a loan, which is secured by a mortgage, deed of trust, or other 
security agreement that creates a first lien on one of the following 
interests in property:
    (i) One-to-four family property or multifamily property, in fee 
simple;
    (ii) A leasehold on one-to-four family property or multifamily 
property under a lease of not less than 99 years that is renewable, or 
under a lease having a period of not less than 50 years to run from the 
date the mortgage was executed; or
    (iii) Combination business or farm property where at least 50 
percent of the total appraised value of the combined property is 
attributable to the residential portion of the property; or
    (2) A mortgage pass-through security that represents an undivided 
ownership interest in:
    (i) Long-term loans, provided that, at the time of issuance of the 
security, all of the loans meet the requirements of paragraph (n)(1) of 
this section; or

[[Page 42543]]

    (ii) A security that represents an undivided ownership interest in 
long-term loans, provided that, at the time of issuance of the 
security, all of the loans meet the requirements of paragraph (n)(1) of 
this section.
    (o) Institutions which are eligible to make application to become 
members means, for purposes of 12 U.S.C. 1431(e)(2)(A), any building 
and loan association, savings and loan association, cooperative bank, 
homestead association, insurance company, savings bank, or any insured 
depository institution, regardless of whether the institution applies 
for or would be approved for membership.
    (p) Insured depository institution means an insured depository 
institution as defined in 12 U.S.C. 1422(12).
    (q) Long-term means a term to maturity of five years or greater.
    (r) Manufactured housing means a manufactured home as defined in 
section 603(6) of the Manufactured Home Construction and Safety 
Standards Act of 1974, as amended (42 U.S.C. 5402(6)).
    (s) Member means an institution that has been approved for 
membership in a Bank and has purchased capital stock in the Bank in 
accordance with Secs. 933.20 or 933.25 of this part.
    (t) Multifamily property means:
    (1) Real property that is solely residential and includes five or 
more dwelling units; or
    (2) Real property that includes five or more dwelling units 
combined with commercial units, provided that the property is primarily 
residential; or
    (3) Nursing homes, dormitories, or homes for the elderly.
    (u) Nonperforming loans, leases and securities means the sum of the 
following, reported on a regulatory financial report: loans, leases and 
debt securities that have been past due for 90 days (60 days in the 
case of credit union applicants) or longer but are still accruing; 
loans, leases and debt securities on a nonaccrual basis; and 
restructured loans and leases (not already reported as nonperforming).
    (v) Nonresidential real property means real property that is not 
used for residential purposes, including business or industrial 
property, hotels, motels, churches, hospitals, educational and 
charitable institution buildings or facilities, clubs, lodges, 
association buildings, golf courses, recreational facilities, farm 
property not containing a dwelling unit, or similar types of property.
    (w) One-to-four family property means:
    (1) Real property that is solely residential, including one-to-four 
family dwelling units or more than four family dwelling units if each 
dwelling unit is separated from the other dwelling units by dividing 
walls that extend from ground to roof, such as row houses, townhouses 
or similar types of property;
    (2) Manufactured housing if applicable state law defines the 
purchase or holding of manufactured housing as the purchase or holding 
of real property;
    (3) Individual condominium dwelling units or interests in 
individual cooperative housing dwelling units that are part of a 
condominium or cooperative building without regard to the number of 
total dwelling units therein; or
    (4) Real property which includes one-to-four family dwelling units 
combined with commercial units, provided the property is primarily 
residential.
    (x) Performing loans, leases and securities means loans, leases and 
debt securities, reported on a regulatory financial report, that do not 
meet the definition of ``nonperforming loans, leases and securities,'' 
as provided in paragraph (u) of this section.
    (y) Primary regulator means the chartering authority for federally-
chartered applicants, the insuring authority for federally-insured 
applicants that are not federally-chartered, or the appropriate state 
regulator for all other applicants.
    (z) Regulatory examination report means a written report of 
examination prepared by the applicant's primary regulator or 
appropriate state regulator, containing, in the case of insured 
depository institution applicants, a composite rating assigned to the 
institution following the guidelines of the Uniform Financial 
Institutions Rating System, including a CAMEL rating, a MACRO rating, 
or other similar rating.
    (aa) Regulatory financial report means a financial report that an 
applicant is required to file with its primary regulator on a specific 
periodic basis, including the quarterly call report for commercial 
banks, thrift financial report for savings associations, quarterly or 
semi-annual call report for credit unions, the National Association of 
Insurance Commissioners' annual or quarterly report for insurance 
companies, or other similar report, including such report maintained by 
the primary regulator on a computer on-line database.
    (bb) Residential mortgage loan means any one of the following types 
of loans, whether or not fully amortizing:
    (1) Home mortgage loans;
    (2) Funded residential construction loans;
    (3) Loans secured by manufactured housing whether or not defined by 
state law as secured by an interest in real property;
    (4) Loans secured by junior liens on one-to-four family property or 
multifamily property;
    (5) Mortgage pass-through securities representing an undivided 
ownership interest in:
    (i) Loans that meet the requirements of paragraphs (bb) (1) through 
(4) of this section at the time of issuance of the security;
    (ii) Securities representing an undivided ownership interest in 
loans, provided that, at the time of issuance of the security, all of 
the loans meet the requirements of paragraphs (bb) (1) through (4) of 
this section; or
    (iii) Mortgage debt securities as defined in paragraph (bb)(6) of 
this section;
    (6) Mortgage debt securities secured by:
    (i) Loans, provided that, at the time of issuance of the security, 
substantially all of the loans meet the requirements of paragraphs (bb) 
(1) through (4) of this section;
    (ii) Securities that meet the requirements of paragraph (bb)(5) of 
this section; or
    (iii) Securities secured by assets, provided that, at the time of 
issuance of the security, all of the assets meet the requirements of 
paragraphs (bb) (1) through (5) of this section; or
    (7) Home mortgage loans secured by a leasehold interest, as defined 
in paragraph (n)(1)(ii) of this section, except that the period of the 
lease term may be for any duration.
    (cc) State means a State of the United States, the District of 
Columbia, Guam, Puerto Rico or the U.S. Virgin Islands.
    (dd) Total assets means the total assets reported on a regulatory 
financial report.
    7. Subpart B of part 933 is revised to read as follows:

Subpart B--Membership Application Process


Sec. 933.2  Membership application requirements.

    (a) Application. An applicant for membership in a Bank shall submit 
to that Bank an application that satisfies the requirements of this 
part. The application shall include a written resolution or 
certification duly adopted by the applicant's board of directors, or by 
an individual with authority to act on behalf of the applicant's board 
of directors, of the following:
    (1) Applicant review. Applicant has reviewed the requirements of 
this part

[[Page 42544]]

and, as required by this part, has provided to the best of applicant's 
knowledge the most recent, accurate and complete information available; 
and
    (2) Duty to supplement. Applicant will promptly supplement the 
application with any relevant information that comes to applicant's 
attention prior to the Bank's decision on whether to approve or deny 
the application, and if the Bank's decision is appealed pursuant to 
Sec. 933.5 of this part, prior to resolution of any appeal by the 
Board.
    (b) Digest. The Bank shall prepare a written digest for each 
applicant stating whether or not the applicant meets each of the 
requirements in Secs. 933.6 to 933.18 of this part, the Bank's findings 
and the reasons therefor.
    (c) File. The Bank shall maintain a membership file for each 
applicant for at least three years after the Bank decides whether to 
approve or deny membership and the resolution of any appeal to the 
Board. The membership file shall contain at a minimum:
    (1) Digest. The digest required by paragraph (b) of this section.
    (2) Required documents. All documents required by Secs. 933.6 to 
933.18 of this part, including those documents required to establish or 
rebut a presumption under this part, shall be described in and attached 
to the digest. The Bank may retain in the file only the relevant 
portions of the regulatory financial reports required by this part. If 
an applicant's primary regulator or appropriate state regulator 
requires return or destruction of a regulatory examination report, the 
date that the report is returned or destroyed shall be noted in the 
file.
    (3) Additional documents. Any additional document submitted by the 
applicant, or otherwise obtained or generated by the Bank, concerning 
the applicant.
    (4) Decision resolution. The decision resolution described in 
Sec. 933.3(b) of this part.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.3  Decision on application.

    (a) Authority. The Board authorizes the Banks to approve or deny 
all applications for membership, subject to the requirements of this 
part. The Bank may delegate the authority to approve membership 
applications only to a committee of the Bank's board of directors, the 
Bank president, or a senior officer who reports directly to the Bank 
president other than an officer with responsibility for business 
development.
    (b) Decision resolution. For each applicant, the Bank shall prepare 
a written resolution duly adopted by the Bank's board of directors, by 
a committee of the board of directors, or by an officer with delegated 
authority to approve membership applications. The decision resolution 
shall state:
    (1) That the statements in the digest are accurate to the best of 
the Bank's knowledge, and are based on a diligent and comprehensive 
review of all available information identified in the digest; and
    (2) The Bank's decision and the reasons therefor. Decisions to 
approve an application should state specifically that: the applicant is 
authorized under the laws of the United States and the laws of the 
appropriate state to become a member of, purchase stock in, do business 
with, and maintain deposits in, the Bank to which the applicant has 
applied; and the applicant meets all of the membership eligibility 
criteria of the Act and this part.
    (c) Action on applications. The Bank shall act on an application 
within 60 calendar days of the date the Bank deems the application to 
be complete. An application is ``complete'' when a Bank has obtained 
all the information required by this part, and any other information 
the Bank deems necessary, to process the application. If an application 
that was deemed complete subsequently is deemed incomplete because the 
Bank determines during the review process that additional information 
is necessary to process the application, the Bank may stop the 60-day 
clock until the application again is deemed complete, and then resume 
the clock where it left off. The Bank shall notify an applicant when 
its application is deemed by the Bank to be complete. The Bank also 
shall notify an applicant if the 60-day clock is stopped, and when the 
clock is resumed. Within three business days of a Bank's decision on an 
application, the Bank shall provide the applicant and the Board's 
Executive Secretary with a copy of the Bank's decision resolution.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.4  Automatic membership.

    (a) Automatic membership for mandatory members. Any institution 
required by law to become a member of a Bank automatically shall become 
a member of the Bank of the district in which its principal place of 
business is located upon the purchase of stock in that Bank pursuant to 
Sec. 933.20(b)(1) of this part.
    (b) Automatic membership for certain charter conversions. An 
insured depository institution member that converts from one charter 
type to another automatically shall become a member of the Bank of 
which the converting institution was a member on the effective date of 
such conversion, provided that the converting institution continues to 
be an insured depository institution and the assets of the institution 
immediately before and immediately after the conversion are not 
materially different. In such case, all relationships existing between 
the member and the Bank at the time of such conversion may continue.
    (c) Automatic membership for transfers. Any member whose membership 
is transferred pursuant to Sec. 933.18(d) of this part automatically 
shall become a member of the Bank to which it transfers.


Sec. 933.5  Appeals.

    (a) Appeals by applicants--(1) Filing procedure. Within 90 calendar 
days of the date of a Bank's decision to deny an application for 
membership, the applicant may file a written appeal of the decision 
with the Board.
    (2) Documents. The applicant's appeal shall be addressed to the 
Executive Secretary, Federal Housing Finance Board, 1777 F Street, NW., 
Washington, DC 20006, with a copy to the Bank, and shall include the 
following documents:
    (i) Bank's decision resolution. A copy of the Bank's decision 
resolution; and
    (ii) Basis for appeal. A statement of the basis for the appeal by 
the applicant with sufficient facts, information, analysis and 
explanation to rebut any applicable presumptions and otherwise support 
the applicant's position.
    (b) Record for appeal--(1) Copy of membership file. Upon receiving 
a copy of an appeal, the Bank whose action has been appealed (appellee 
Bank) shall provide the Board with a copy of the applicant's complete 
membership file. Until the Board resolves the appeal, the appellee Bank 
shall supplement the materials provided to the Board as any new 
materials are received.
    (2) Additional information. The Board may request additional 
information or further supporting arguments from the appellant, the 
appellee Bank or any other party that the Board deems appropriate.
    (c) Deciding appeals. The Board shall consider the record for 
appeal described in paragraph (b) of this section and shall resolve the 
appeal based on the requirements of the Act and this part within 90 
calendar days of the date the appeal is filed with the Board. In 
deciding the appeal, the Board shall

[[Page 42545]]

apply the presumptions in this part, unless the appellant or appellee 
Bank presents evidence to rebut a presumption as provided in 
Sec. 933.17 of this part.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)

    8. Subpart C is added to part 933 to read as follows:

Subpart C--Eligibility Requirements


Sec. 933.6  General eligibility requirements.

    (a) Requirements. Any building and loan association, savings and 
loan association, cooperative bank, homestead association, insurance 
company, savings bank, or insured depository institution, upon 
application satisfying all of the requirements of the Act and this 
part, shall be eligible to become a member of a Bank if:
    (1) It is duly organized under the laws of any State or of the 
United States;
    (2) It is subject to inspection and regulation under the banking 
laws, or under similar laws, of any State or of the United States;
    (3) It makes long-term home mortgage loans;
    (4) Its financial condition is such that advances may be safely 
made to it;
    (5) The character of its management is consistent with sound and 
economical home financing; and
    (6) Its home financing policy is consistent with sound and 
economical home financing.
    (b) Additional eligibility requirement for insured depository 
institutions. In order to be eligible to become a member of a Bank, an 
insured depository institution applicant also must have at least 10 
percent of its total assets in residential mortgage loans.
    (c) Additional eligibility requirement for applicants that are not 
insured depository institutions. In order to be eligible to become a 
member of a Bank, an applicant that is not an insured depository 
institution also must have mortgage-related assets that reflect a 
commitment to housing finance, as determined by the Bank in its 
discretion.
    (d) Ineligibility. Except as otherwise provided in this part, if an 
applicant does not satisfy the requirements of this part, the applicant 
is ineligible for membership.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.7  Duly organized requirement.

    An applicant shall be deemed to be duly organized as required by 
section 4(a)(1)(A) of the Act and Sec. 933.6(a)(1) of this part, if it 
is chartered by a state or federal agency as a building and loan 
association, savings and loan association, cooperative bank, homestead 
association, insurance company, savings bank or insured depository 
institution.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.8  Subject to inspection and regulation requirement.

    An applicant shall be deemed to be subject to inspection and 
regulation as required by section 4(a)(1)(B) of the Act and 
Sec. 933.6(a)(2) of this part, if, in the case of a depository 
institution applicant, it is subject to inspection and regulation by 
the Federal Deposit Insurance Corporation, the Federal Reserve Board, 
the National Credit Union Administration, the Office of the Comptroller 
of the Currency, the Office of Thrift Supervision, or other appropriate 
state regulator, and, in the case of an insurance company applicant, it 
is subject to inspection and regulation by an appropriate state 
regulator accredited by the National Association of Insurance 
Commissioners.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.9  Makes long-term home mortgage loans requirement.

    An applicant shall be deemed to make long-term home mortgage loans 
as required by section 4(a)(1)(C) of the Act and Sec. 933.6(a)(3) of 
this part, if, based on the applicant's most recent regulatory 
financial report filed with its primary regulator, the applicant 
originates or purchases long-term home mortgage loans.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.10  10 percent requirement for insured depository institution 
applicants.

    An insured depository institution applicant shall be deemed to be 
in compliance with the 10 percent requirement of section 4(a)(2)(A) of 
the Act and Sec. 933.6(b) of this part, if, based on the applicant's 
most recent regulatory financial report filed with its primary 
regulator, the applicant has at least 10 percent of its total assets in 
residential mortgage loans, except that any assets used to secure 
mortgage debt securities as described in Sec. 933.1(bb)(6) of this part 
shall not be used to meet this requirement.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.11  Financial condition requirement for applicants other than 
insurance companies.

    (a) Review requirement. In determining whether an applicant other 
than an insurance company has complied with the financial condition 
requirement of section 4(a)(2)(B) of the Act and Sec. 933.6(a)(4) of 
this part, the Bank shall obtain as a part of the membership 
application and review each of the following documents:
    (1) Regulatory financial reports. The regulatory financial reports 
filed by the applicant with its primary regulator for the last six 
calendar quarters and three year-ends preceding the date the Bank 
receives the application;
    (2) Financial statement. In order of preference: the most recent 
independent audit of the applicant conducted in accordance with 
generally accepted auditing standards by a certified public accounting 
firm which submits a report on the applicant; the most recent 
independent audit of the applicant's parent holding company conducted 
in accordance with generally accepted auditing standards by a certified 
public accounting firm which submits a report on the consolidated 
holding company but not on the applicant separately; the most recent 
Directors' examination of the applicant conducted in accordance with 
generally accepted auditing standards by a certified public accounting 
firm; the most recent Directors' examination of the applicant performed 
by other external auditors; the most recent review of the applicant's 
financial statements by external auditors; the most recent Compilation 
of the applicant's financial statements by external auditors; or the 
most recent audit of other procedures of the applicant;
    (3) Regulatory examination report. The applicant's most recent 
available regulatory examination report prepared by its primary 
regulator or appropriate state regulator, a summary prepared by the 
Bank of the applicant's strengths and weaknesses as cited in the 
regulatory examination report, and a summary prepared by the Bank or 
applicant of actions taken by the applicant to respond to examination 
weaknesses;
    (4) Enforcement actions. A description prepared by the Bank or 
applicant of any outstanding enforcement actions against the applicant, 
responses by the applicant, reports as required by the enforcement

[[Page 42546]]

action, and verbal or written indications, if available, from the 
primary regulator or appropriate state regulator, whichever is 
applicable, of how the applicant is complying with the terms of the 
enforcement action; and
    (5) Additional information. Any other relevant document or 
information concerning the applicant that comes to the Bank's attention 
in reviewing the applicant's financial condition.
    (b) Standards. An applicant other than an insurance company shall 
be deemed to be in compliance with the financial condition requirement 
of section 4(a)(2)(B) of the Act and Sec. 933.6(a)(4) of this part, if:
    (1) Recent composite regulatory examination rating. The applicant 
has received a composite regulatory examination rating from its primary 
regulator or appropriate state regulator within two years preceding the 
date the Bank receives the application;
    (2) Capital requirement. The applicant meets all of its minimum 
statutory and regulatory capital requirements as reported in its most 
recent quarter-end regulatory financial report filed with its primary 
regulator; and
    (3) Minimum performance standard. (i) The applicant's most recent 
composite regulatory examination rating from its primary regulatory or 
appropriate state regulator within the past two years was ``1;'' or, 
was ``2'' or ``3'' and, based on the applicant's most recent regulatory 
financial report filed with its primary regulator, the applicant 
satisfied all of the following performance trend criteria:
    (A) Earnings. The applicant's adjusted net income was positive in 
four of the six most recent calendar quarters;
    (B) Nonperforming assets. The applicant's nonperforming loans, 
leases and securities plus foreclosed and repossessed real estate, did 
not exceed 10 percent of its performing loans, leases and securities 
plus foreclosed and repossessed real estate, in the most recent 
calendar quarter; and
    (C) Allowance for loan and lease losses. The applicant's ratio of 
its allowance for loan and lease losses to nonperforming loans, leases 
and securities was 60 percent or greater during 4 of the 6 most recent 
calendar quarters.
    (ii) For applicants that are not required to report financial data 
to their primary regulator on a quarterly basis, the information 
required in paragraph (b)(3)(i) of this section may be reported on a 
semiannual basis.
    (c) Eligible collateral not considered. The availability of 
sufficient eligible collateral to secure advances to the applicant is 
presumed and shall not be considered in determining whether an 
applicant is in the financial condition required by section 4(a)(2)(B) 
of the Act and Sec. 933.6(a)(4) of this part.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.12  Character of management requirement.

    An applicant shall be deemed to be in compliance with the character 
of management requirement of section 4(a)(2)(C) of the Act and 
Sec. 933.6(a)(5) of this part, if the applicant provides to the Bank an 
unqualified written certification duly adopted by the applicant's board 
of directors, or by an individual with authority to act on behalf of 
the applicant's board of directors, that:
    (a) Enforcement actions. Neither the applicant nor any of its 
directors or senior officers is subject to, or operating under, any 
enforcement action instituted by its primary regulator or appropriate 
state regulator;
    (b) Criminal, civil or administrative proceedings. Neither the 
applicant nor any of its directors or senior officers has been the 
subject of any criminal, civil or administrative proceedings reflecting 
upon creditworthiness, business judgment, or moral turpitude since the 
most recent regulatory examination report; and
    (c) Criminal, civil or administrative monetary liabilities, 
lawsuits or judgments. There are no known potential criminal, civil or 
administrative monetary liabilities, material pending lawsuits, or 
unsatisfied judgments against the applicant or any of its directors or 
senior officers since the most recent regulatory examination report, 
that are significant to the applicant's operations.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.13  Home financing policy requirement.

    (a) Standard. An applicant shall be deemed to be in compliance with 
the home financing policy requirement of section 4(a)(2)(C) of the Act 
and Sec. 933.6(a)(6) of this part, if the applicant has received a 
Community Reinvestment Act (CRA) rating of ``Satisfactory'' or better 
on its most recent formal, or if unavailable, informal or preliminary, 
CRA performance evaluation.
    (b) Written justification required. An applicant that is not 
subject to the CRA shall file as part of its application for membership 
a written justification acceptable to the Bank of how and why the 
applicant's home financing policy is consistent with the Bank System's 
housing finance mission.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.14  De novo insured depository institution applicants.

    (a)- Newly chartered applicants that have not commenced 
operations--(1) Duly organized, subject to inspection and regulation, 
financial condition and character of management requirements. An 
insured depository institution applicant that is newly chartered and 
has not yet commenced operations, is deemed to meet the requirements of 
Secs. 933.7, 933.8, 933.11 and 933.12 of this part.
    (2) Makes long-term home mortgage loans requirement. The applicant 
shall be deemed to make long-term home mortgage loans as required by 
Sec. 933.9 of this part, if it has filed as part of its application for 
membership a written justification acceptable to the Bank of how its 
home financing credit policy and lending practices will include 
originating or purchasing long-term home mortgage loans.
    (3) 10 percent requirement. The applicant shall have until one year 
after commencing its initial business operations to meet the 10 percent 
requirement of Sec. 933.10 of this part.
    (4) Home financing policy requirement--(i) Conditional approval. An 
applicant that has not received its first formal, or if unavailable, 
informal or preliminary, Community Reinvestment Act (CRA) performance 
evaluation, shall be conditionally deemed to be in compliance with the 
home financing policy requirement of section 4(a)(2)(C) of the Act and 
Sec. 933.6(a)(6) of this part, if the applicant has filed as part of 
its application for membership a written justification acceptable to 
the Bank of how and why its home financing credit policy and lending 
practices will meet the credit needs of its community. An applicant 
that receives such conditional membership approval is subject to the 
stock purchase requirements of Sec. 933.20 of this part and the 
advances provisions of 12 CFR part 935.
    (ii) Approval. The applicant shall be deemed to be in compliance 
with the home financing policy requirement of section 4(a)(2)(C) of the 
Act and Sec. 933.6(a)(6) of this part upon receipt by the Bank of 
evidence from the applicant that it received a CRA rating of 
``Satisfactory'' or better on its first

[[Page 42547]]

formal, or if unavailable, informal or preliminary, CRA performance 
evaluation.
    (iii) Conditional approval deemed null and void. If the applicant's 
first such CRA rating is ``Needs to Improve'' or ``Substantial Non-
Compliance,'' the applicant shall be deemed to be in noncompliance with 
the home financing policy requirement of section 4(a)(2)(C) of the Act 
and Sec. 933.6(a)(6) of this part, subject to rebuttal by the applicant 
under Sec. 933.17(f) of this part, and its conditional membership 
approval is deemed null and void.
    (iv) Treatment of outstanding advances and Bank stock. If the 
applicant's conditional membership approval is deemed null and void 
pursuant to paragraph (a)(4)(iii) of this section, the liquidation of 
any outstanding indebtedness owed by the applicant to the Bank and 
redemption of stock of such Bank shall be carried out in accordance 
with Sec. 933.29 of this part.
    (b) Newly chartered applicants that have recently commenced 
operations. An insured depository institution applicant that is newly 
chartered and has commenced operations, is subject to the requirements 
of Secs. 933.7 to 933.13 of this part except as provided in this 
paragraph (b).
    (1) 10 percent requirement. The applicant shall have until one year 
after commencing its initial business operations to meet the 10 percent 
requirement of Sec. 933.10 of this part.
    (2) Financial condition requirement. (i) Regulatory financial 
reports. For purposes of Sec. 933.11(a)(1) of this part, if the 
applicant has not yet filed regulatory financial reports with its 
primary regulator for the last six calendar quarters and three year-
ends preceding the date the Bank receives the application, the 
applicant shall provide any regulatory financial reports that it has 
filed with its primary regulator.
    (ii) Recent composite regulatory examination rating. For purposes 
of Sec. 933.11(b)(1) and (3) of this part, if the applicant has not yet 
received a composite regulatory examination rating from its primary 
regulator or appropriate state regulator, the applicant shall provide a 
preliminary or informal, written composite regulatory examination 
rating, if available, from its primary regulator or appropriate state 
regulator.
    (iii) Performance trend criteria. If the applicant has not yet 
filed regulatory financial reports with its primary regulator for the 
last six calendar quarters preceding the date the Bank receives its 
application for membership, the applicant need not meet the performance 
trend criteria in Sec. 933.11(b)(3)(i)(A) to (C) of this part, if:
    (A) Reports for three quarters. The applicant has filed regulatory 
financial reports with its primary regulator for at least three 
calendar quarters of operation; and
    (B) Business plan compliance. The Bank determines that the 
applicant is in substantial compliance with the terms of its regulatory 
business plan.
    (3) Home financing policy requirement. For purposes of Sec. 933.13 
of this part, an applicant that has not received its first formal, or 
if unavailable, informal or preliminary, CRA performance evaluation, is 
subject to the home financing policy requirements of paragraph (a)(4) 
of this section.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.15  Recent merger or acquisition applicants.

    An applicant that merged with or acquired another institution prior 
to the date the Bank receives its application for membership is subject 
to the requirements of Secs. 933.7 to 933.13 of this part except as 
provided in this section.
    (a) Financial condition requirement--(i) Regulatory financial 
reports. For purposes of Sec. 933.11(a)(1) of this part, an applicant 
that, as a result of a merger or acquisition preceding the date the 
Bank receives its application for membership, has not yet filed 
regulatory financial reports with its primary regulator for the last 
six calendar quarters and three year-ends preceding such date, shall 
provide any regulatory financial reports that the applicant has filed 
with its primary regulator.
    (ii) Performance trend criteria. For purposes of 
Sec. 933.11(b)(3)(i)(A) to (C) of this part, an applicant that, as a 
result of a merger or acquisition preceding the date the Bank receives 
its application for membership, has not yet filed combined regulatory 
financial reports with its primary regulator for the last six calendar 
quarters preceding such date, shall provide pro forma combined 
financial statements for those calendar quarters in which actual 
combined regulatory financial reports are unavailable.
    (b) Home financing policy requirement. For purposes of Sec. 933.13 
of this part, an applicant that, as a result of a merger or acquisition 
preceding the date the Bank receives its application for membership, 
has not received its first formal, or if unavailable, informal or 
preliminary, Community Reinvestment Act performance evaluation, shall 
file as part of its application a written justification acceptable to 
the Bank of how and why the applicant's home financing credit policy 
and lending practices will meet the credit needs of its community.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.16  Financial condition requirement for insurance company 
applicants.

    An insurance company applicant shall be deemed to meet the 
financial condition requirement of section 4(a)(2)(B) of the Act and 
Sec. 933.6(a)(4) of this part, if, based on the information contained 
in the applicant's most recent regulatory financial report filed with 
its primary regulator, the applicant meets all of its minimum statutory 
and regulatory capital requirements and the capital standards 
established by the National Association of Insurance Commissioners.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.17  Rebuttable presumptions.

    (a) Rebutting presumptive compliance. The presumption that an 
applicant meeting the requirements of Secs. 933.7 to 933.16 of this 
part is in compliance with section 4(a) of the Act and Sec. 933.6 (a) 
and (b) of this part, may be rebutted, and the Bank may deny membership 
to the applicant, if the Bank obtains substantial evidence to overcome 
the presumption of compliance.
    (b) Rebutting presumptive noncompliance. The presumption that an 
applicant not meeting a particular requirement of Secs. 933.8, 933.11, 
933.12, 933.13, or 933.16 of this part is in noncompliance with section 
4(a) of the Act and Sec. 933.6(a) (2), (4), (5) or (6) of this part, 
may be rebutted, and the applicant shall be deemed to meet such 
requirement, if the applicable requirements in this section are 
satisfied.
    (c) Presumptive noncompliance by insurance company applicant with 
``subject to inspection and regulation'' requirement of Sec. 933.8. If 
an insurance company applicant is not subject to inspection and 
regulation by an appropriate state regulator accredited by the National 
Association of Insurance Commissioners (NAIC), as required by 
Sec. 933.8 of this part, the applicant or the Bank shall prepare a 
written justification that provides substantial evidence acceptable to 
the Bank that the

[[Page 42548]]

applicant is subject to inspection and regulation as required by 
Sec. 933.6(a)(2) of this part, notwithstanding the lack of NAIC 
accreditation.
    (d) Presumptive noncompliance with financial condition requirements 
of Secs. 933.11 and 933.16--(1) Applicants other than insurance 
companies. For applicants other than insurance companies, in the case 
of an applicant's lack of a composite regulatory examination rating 
within the two-year period required by Sec. 933.11(b)(1) of this part, 
a variance from the rating required by Sec. 933.11(b)(3)(i) of this 
part, or a variance from a performance trend criterion required by 
Sec. 933.11(b)(3)(i) of this part, the applicant or the Bank shall 
prepare a written justification pertaining to such requirement that 
provides substantial evidence acceptable to the Bank that the applicant 
is in the financial condition required by Sec. 933.6(a)(4) of this 
part, notwithstanding the lack of rating or variance.
    (2) Insurance company applicants. In the case of an insurance 
company applicant's variance from a capital requirement or standard of 
Sec. 933.16 of this part, the applicant or the Bank shall prepare a 
written justification pertaining to such requirement or standard that 
provides substantial evidence acceptable to the Bank that the applicant 
is in the financial condition required by Sec. 933.6(a)(4) of this 
part, notwithstanding the variance.
    (e) Presumptive noncompliance with character of management 
requirement of Sec. 933.12--(1) Enforcement actions. If an applicant or 
any of its directors or senior officers is subject to, or operating 
under, any enforcement action instituted by its primary regulator or 
appropriate state regulator, the applicant shall provide or the Bank 
shall obtain:
    (i) Regulator confirmation. Written or verbal confirmation from the 
applicant's primary regulator or appropriate state regulator, whichever 
is applicable, that the applicant or its directors or senior officers 
are in substantial compliance with all aspects of the enforcement 
action; or
    (ii) Written analysis. A written analysis acceptable to the Bank 
indicating that the applicant or its directors or senior officers are 
in substantial compliance with all aspects of the enforcement action. 
The written analysis shall state each action the applicant or its 
directors or senior officers are required to take by the enforcement 
action, the actions actually taken by the applicant or its directors or 
senior officers, and whether the applicant regards this as substantial 
compliance with all aspects of the enforcement action.
    (2) Criminal, civil or administrative proceedings. If an applicant 
or any of its directors or senior officers has been the subject of any 
criminal, civil or administrative proceedings reflecting upon 
creditworthiness, business judgment, or moral turpitude since the most 
recent regulatory examination report, the applicant shall provide or 
the Bank shall obtain:
    (i) Regulator confirmation. Written or verbal confirmation from the 
applicant's primary regulator or appropriate state regulator that the 
proceedings will not likely result in enforcement action; or
    (ii) Written analysis. A written analysis acceptable to the Bank 
indicating that the proceedings will not likely result in enforcement 
action. The written analysis shall state the severity of the charges, 
and any mitigating action taken by the applicant or its directors or 
senior officers.
    (3) Criminal, civil or administrative monetary liabilities, 
lawsuits or judgments. If there are any known potential criminal, civil 
or administrative monetary liabilities, material pending lawsuits, or 
unsatisfied judgments against the applicant or any of its directors or 
senior officers since the most recent regulatory examination report, 
that are significant to the applicant's operations, the applicant shall 
provide or the Bank shall obtain:
    (i) Regulator confirmation. Written or verbal confirmation from the 
applicant's primary regulator or appropriate state regulator that the 
liabilities, lawsuits or judgments will not likely cause the applicant 
to fall below its applicable capital requirements set forth in 
Secs. 933.11(b)(2) and 933.16 of this part; or
    (ii) Written analysis. A written analysis acceptable to the Bank 
indicating that the liabilities, lawsuits or judgments will not likely 
cause the applicant to fall below its applicable capital requirements 
set forth in Secs. 933.11(b)(2) and 933.16 of this part. The written 
analysis shall state the likelihood of the applicant or its directors 
or senior officers prevailing, and the financial consequences if the 
applicant or its directors or senior officers do not prevail.
    (f) Presumptive noncompliance with home financing policy 
requirements of Secs. 933.13, 933.14(a)(4), and 933.14(b)(3). If an 
applicant received a ``Substantial Non-Compliance'' rating on its most 
recent formal, or if unavailable, informal or preliminary, Community 
Reinvestment Act (CRA) performance evaluation, or a ``Needs to 
Improve'' CRA rating on its most recent formal, or if unavailable, 
informal or preliminary, CRA performance evaluation and a CRA rating of 
``Needs to Improve'' or better on any immediately preceding CRA 
performance evaluation, the applicant shall provide or the Bank shall 
obtain:
    (1) Regulator confirmation. Written or verbal confirmation from the 
applicant's primary regulator of the applicant's recent satisfactory 
CRA performance, including any corrective action that substantially 
improved upon the deficiencies cited in the most recent CRA performance 
evaluation(s); or
    (2) Written analysis. A written analysis acceptable to the Bank 
demonstrating that the CRA rating is unrelated to home financing, and 
providing substantial evidence of how and why the applicant's home 
financing credit policy and lending practices meet the credit needs of 
its community.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)


Sec. 933.18   Determination of appropriate Bank district for 
membership.

    (a) Eligibility. (1) An institution eligible to become a member of 
a Bank under the Act and this part may become a member only of the Bank 
of the district in which the institution's principal place of business 
is located, except as provided in paragraph (a)(2) of this section.
    (2) An institution eligible to become a member of a Bank under the 
Act and this part may become a member of the Bank of a district 
adjoining the district in which the institution's principal place of 
business is located, if demanded by convenience and then only with the 
approval of the Board.
    (b) Principal place of business. Except as otherwise designated in 
accordance with this section, the principal place of business of an 
institution is the state in which the institution maintains its home 
office established as such in conformity with the laws under which the 
institution is organized.
    (c) Designation of principal place of business. (1) A member or an 
applicant for membership may request in writing to the Bank in the 
district where the institution maintains its home office that a state 
other than the state in which it maintains its home office be 
designated as its principal place of business. Within 90 calendar days 
of receipt of such written request, the board of directors of the Bank 
in the district where the institution maintains its home office shall 
designate a state other than the state where the

[[Page 42549]]

institution maintains its home office as the institution's principal 
place of business, provided all of the following criteria are 
satisfied:
    (i) At least 80 percent of the institution's accounting books, 
records and ledgers are maintained, located or held in such designated 
state;
    (ii) A majority of meetings of the institution's board of directors 
and constituent committees are conducted in such designated state; and
    (iii) A majority of the institution's five highest paid officers 
have their place of employment located in such designated state.
    (2) Written notice of a designation made pursuant to paragraph 
(c)(1) of this section shall be sent to the Bank in the district 
containing the designated state, the Board and the institution.
    (3) The notice of designation made pursuant to paragraph (c)(1) of 
this section shall include the state designated as the principal place 
of business and the resulting Bank to which membership will be 
transferred.
    (4) If the board of directors of the Bank in the district where the 
institution maintains its home office fails to make the designation 
requested by the member or applicant pursuant to paragraph (c)(1) of 
this section, then the member or applicant may request in writing that 
the Board make the designation.
    (d) Transfer of membership. (1) No transfer of membership from one 
Bank to another Bank shall take effect until the Banks involved reach 
agreement on a method of orderly transfer.
    (2) In the event that the Banks involved fail to agree on a method 
of orderly transfer, the Board shall determine the conditions under 
which the transfer shall take place.
    (e) Effect of transfer. A transfer of membership pursuant to this 
section shall be effective for all purposes including directorial 
representation under section 7(c) of the Act, 12 U.S.C. 1427(c), and 
Sec. 932.11 of this chapter, but shall not be subject to the provisions 
on termination of membership set forth in section 6 of the Act, 12 
U.S.C. 1426, or Secs. 933.26, 933.27 and 933.29 of this part, including 
the restriction on reacquiring Bank membership set forth in Sec. 933.30 
of this part.

(The information collection requirements contained in this section 
have been approved by the Office of Management and Budget under 
control number 3069-0004.)

    9. In the list below, for each newly designated section indicated 
in the left column, remove the reference indicated in the middle column 
from where it appears and add the reference indicated in the right 
column:

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           Section                   Remove                  Add        
------------------------------------------------------------------------
933.20(b)(1)................  Secs.  933.2(c) or    Sec.  933.3, Sec.   
                               933.3, Sec.           933.4(a).          
                               933.2(d).                                
933.20(b)(2)................  Sec.  933.2(d)......  Sec.  933.4(a).     
933.22(b)(1)................  Sec.  933.7(a), Sec.  Sec.  933.20(a),    
                                933.18(d).           Sec.  933.31(d).   
933.23......................  Sec.  933.7(a)......  Sec.  933.20(a).    
933.24(a)(2)................  Sec.  933.7(a)......  Sec.  933.20(a).    
933.24(b)(2)................  Sec.  933.16........  Sec.  933.29.       
933.25(c)...................  Sec.  933.2.........  Subpart B.          
933.25(d)(2) (ii) (A) and     Sec.  933.7(a)......  Sec.  933.20(a).    
 (B), and (iii).                                                        
933.25(d)(3)................  Sec.  933.16........  Sec.  933.29.       
933.26(c)...................  Sec.  933.16........  Sec.  933.29.       
933.27(e)...................  Sec.  933.16........  Sec.  933.29.       
933.28(b)...................  Sec.  933.16........  Sec.  933.29.       
933.29(a)(1)................  Secs.  933.13,        Secs.  933.26,      
                               933.14 or 933.15,     933.27 or 933.28,  
                               Sec.  933.15, Secs.   Sec.  933.28, Secs.
                               933.11(b), or         933.24(b) or       
                               933.12(d)(3).         933.25(d)(3).      
933.30 introductory text....  Sec.  933.13........  Sec.  933.26.       
933.30(a)...................  Sec.  933.5.........  Sec.  933.18.       
933.30(b)...................  Sec.  933.2(d)......  Sec.  933.4(a).     
933.31(d)...................  Sec.  933.9(b)(1)...  Sec.  933.22(b)(1). 
------------------------------------------------------------------------

    Dated: August 2, 1996.

    By the Board of Directors of the Federal Housing Finance Board. 
--------
Bruce A. Morrison,
Chairman.
[FR Doc. 96-20487 Filed 8-15-96; 8:45 am]
BILLING CODE 6725-01-U